As a freelancer, you probably started doing what you do as a hobby, but now you are facing a different problem: do freelancers need a business license? Are there any advantages to getting one - or risks to not getting one?
No matter the freelancing work that you do, you need to think about how much money you plan to make from it, as well as your intent. If you plan to turn your freelancing job into a career, then you might want to get yourself savvy on how to get a license for your small business.
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Most Common Business Structures for Small Business Owners
Very often, the business entity you will apply for will depend on where you are issuing, as well as what you plan to do with your business in the future. Depending on your business structure, you may or may not need to get a business license.
Here are the most common business structure types that self-employed people typically go for:
Beginning a sole proprietorship represents a good option for business owners who are mainly alone in what they do. For example, if you are a freelancer and you're the only one doing the work for your client, then this might be the most appropriate choice.
With a sole proprietorship, your freelance business will be labeled under your name. This means that there will be no legal distinction between your business and your name.
With a sole proprietorship, you will get to put all the business profits that you make in your own pocket. Since you won't have any partners or shareholders in your limited liability company, you can make all the decisions yourself, and all the money will go into your account.
There won't be a legal need to apply for a license either, as the registration will double as proof of business. You may only apply if you need the extra credibility for your clients.
The main disadvantage with a sole proprietorship is that you have personal liability for anything that might go wrong. There's no legal difference between yourself and your business. Therefore, if you are a sole proprietor and your business goes out, then your personal assets are put at risk.
Sole proprietorships are usually a good option when freelancers need a business license and have a low risk for a legal dispute to happen. If you register your business as the only person in it, this can save you a lot of hassle in the long run.
Limited Liability Company (LLC)
An LLC is a mix between a sole proprietorship and a corporation. Those who go for this type of business will get legal protection if something were to happen with their business.
Unlike being a sole proprietor, an LLC benefits from protection of your personal assets in case you file for bankruptcy or face a lawsuit. You also avoid corporate taxes, as your losses and profits go straight to your personal tax return.
With an LLC, you have the freedom of changing your company's federal tax classification. In the long run, this allows you to save money, as you will not be paying for a tax classification that you do not belong to.
An LLC offers you limited liability protection, which can be both an advantage and a drawback. Your assets are protected with this type of business license, but at the same time, you don't receive as much protection coverage. In the long run, this may still put you at risk.
The downside is that compared to a sole proprietorship, an LLC is a bit more difficult to file for. You will also end up paying more taxes than you would as a sole proprietor. This makes LLCs a convenient solution for small business owners with a few employees, but also a slightly more expensive one.
When you make an IRS selection, you may receive the S-corporation (or simply, S-corp) status. Before you can do this, you need to register for a corporation first, or some sort of company, such as an LLC.
The main benefit of an S-corporation is that you'll be able to save money on tax time. Your losses and your profits will go to the personal tax return, in which case your small business will not be taxed. Social Security and Medicare is the area in which you are most likely to get tax advantages.
Moreover, this type of business entity offers limited liability protection. Since your name and the name of the business entity are separate, you will not be held personally liable for what happened. Sure, there will be some liability there - but as the name suggests, the liability is limited.
If you need a business license and go for an S-corporation, then you need to keep in mind that the rules of the IRS are slightly more complicated. The limited liability protection, while advantageous at times, can also prove disadvantageous for a small business.
Compared to a sole proprietorship or an LLC, the expenses are also higher. The operation costs are usually in the high range, so it's only a good option for you if you already have a large pool of clients and want to expand your business.
Business License Types
Now that you know exactly what type of freelance business you want to run and have the paperwork and registration for it, make sure that you choose your business license accordingly.
Remember, when you register your business under a general business license, it has to fit a certain business category. Here is what you should know:
Doing Business As (DBA)
The DBA is a business license required in case you are running your business under a name that is not yours. For instance, if you were a freelancer named Lily Richardson, you'd be able to give your business a name that is not necessarily your own.
Bear in mind that if you plan on keeping your own name for your business, then there's no need for a DBA. You can go on as you are.
City or County License
If you decide to do freelancing work and you do not need a DBA, then you may go for the classic city or county business license. A city or county license is a permit that allows you to collect your tax revenue, and gives you permission to do business there.
Depending on the area that you are in, you may or may not need a business license. It mostly depends on the type of business that you are running. For instance, if you are a sole proprietor, then there will be no need for a business license. You can go around with the registration for your sole proprietorship.
On the other hand, if you are required to get a county or a city license, then you'll have to go to the office, fill in the necessary forms, and then pay the fee you need to get your business license.
When you start doing business as a freelancer, you might need a license for doing your freelance work at home. This usually applies to those who decide to work from their home office rather than an actual office or a co-working space.
Depending on where you are, you may or may not need an alternative business license for the zoning. Some areas might result in a penalty fee if you work from home without a license. This is why it pays to check if you need such a permit in order to work from home.
The type of business that you run will also affect whether you will need such a permit or not. For instance, if you are doing physical work and need a variety of operational tools, then you may need a permit for that. On the other hand, if you are doing marketing freelancing work or are offering consulting services, you might not need this type of business permit.
How Much Does It Cost to Get a Business License?
Those who need a business license will be glad to find out that they don't have to spend a lot of money if they have to register. In fact, it will only cost somewhere between $34 and $100.
The fee typically depends on where you are opening your business. All cities or states have their own fees. Depending on where you are running your business, you may get away with a one-time fee, or you may require an annual fee. It serves to become acquainted with the laws in your state.
Benefits Of Getting Your Freelance Business License
In case it wasn't obvious, getting a business license comes with various benefits. Here are some of them:
You Get a Sense of Legitimacy
Nowadays, everyone is looking for an experienced professional to hire for their services. If they find out that you do not have a license to practice in your field, people might feel reluctant to hire you, for fear of scammers.
A license with your name on it, allowing you to provide an official receipt, will put your clients' minds at ease. They will feel more confident when it comes to hiring your services. Plus, as someone with a general business license, it should be much easier for you to get your name out there.
Tax Payments Double as Proof of Earning
Whenever you try to apply for a loan or a credit card, you will need to offer proof of income - that you actually get paid for something, and that you'll be able to pay off your loan. As a freelancer without a license, you might not have any ways to prove your income.
However, if you do have a business license, the annual income tax return will double as proof of earning. Hang on to all of those papers so that you may use them when you apply for a loan, no matter if it's a bank or a private lending company.
It may sound tedious to keep paying taxes now that you have a business license. However, in the long run, it will actually help you keep your income secure. Your business license will prompt you to pay your taxes on time, allowing you to steer clear of surcharges and penalties.
You Avoid Tax Evasion Charges
As per the laws of the IRS, business owners must pay taxes for what they earn. Tax evasion is against the law, and you will receive punishment for it no matter the state that you live in. By getting a freelance business license, you will become eligible for tax payments - and therefore, will avoid tax evasion charges.
How Do I Become a Freelancer Legally?
Becoming a legal freelancer might sound to someone like an "easy way out of running a business." However, even if you are working for yourself, providing freelancing services, you are still a type of business owner - your own boss, so to speak.
This means that in order to offer your services, you must become a business owner. You need to go through all the important steps - which includes getting a business license.
Set Up a Website
This might not seem like it has much to do with the legal part of a business, but in truth, it has everything to do with it. Every business needs a footprint, and a website is the best way to make your presence known.
Get a Business Card
As a freelancer, you must be able to contact clients and get your name out there. Business cards are a good way of saying that you mean business, and they will also help you when getting a permit. After all, along with the website, a business card will serve as proof that you are serious about your business.
Select the Business Structure
As a freelancer working for yourself, you need to determine which business structure works best for you. You may choose between sole proprietorship, LLC or s-corp, depending on how many people you have working with you. Read more about the advantages to incorporating.
Get Your Licenses and Permit
You determined what business stricture you want your freelancing activity to be. Now it's time for you to apply for the actual license or the permit. Here, you can also determine whether you want a DBA or a local permit. Check the regulations of your area as well.
Know Your Estimated Taxes
Now that you are legally working as a freelancer, you need to know all about your tax deadline. In most cases, you will have to pay on a quarterly basis. Make sure to keep all your receipts as proof of payment.
At this point, you are legally set. All that is left for you to do is to offer your freelancing services to those who hire you, and pay your dues during tax season. You are a legal business owner now, so you'll have to consciously make payments.
What If I Don't Get a Business License?
If you operate without a business license, there is a good chance you'll be putting yourself at risk. Even if you feign ignorance or play dumb, it won't do you any good. You need a business license, and if you fail to get one, then you'll be charged a penalty fee.
At first, the penalty fee may be small. However, the more you dodge the licensing, the more you'll be paying for it. If the government finds out that you've been running a business with no license for a while, they may retroactively charge you.
How Much Is the Penalty?
The penalty will depend on a variety of factors, such as how long you've been running the business and how many services you are providing on a regular basis. You could be paying as little as $20, or you may have to pay a hefty $500.
It might not seem like much, but $500 can cause a setback in your work. You'll run out of funds, and you may have to take on more projects than you can handle just so that you can cover the gap.
In extreme circumstances, dodging the business license can lead to arrest, lawsuit, or closure of the business once your personal assets have been seized. This usually happens to those that make a great profit from their business, without actually registering.
Working in the freelance area might sound confusing at points, and you may have a couple of questions. Here are some of the most commonly asked questions, along with their answers:
Can Business Owners Be Freelancers?
More and more people are hiring freelancers to do their work. This can be either a business entity trying to hire an extra hand or a client looking for a person to do the job. This allows freelancers or sole proprietorships to become self-employed people, running their own legal businesses.
Why Do Freelancers Need a License?
A business license registers you as the owner of a business or a service, allowing the IRS to keep tabs on you and enabling you to get tax deductions. Every bit of income, no matter how small, needs to be declared - and doing it under a business license is the easiest way to prevent tax evasion charges.
Do I Need an LLC as a Freelancer?
The quick answer is: no, you don't necessarily need an LLC to do freelancing work. Your tax bill won't go down a lot either, should you opt for a license with this kind of business entity. The only way it might help you is if your earnings on form 1099 are quite significant.
How Do Freelancers Report Their Income?
For freelancers to report their income, they need to fill out Schedule C from Form 1040. This is where all the income and expenses will be declared. Other forms may also be necessary, depending on the type of business that you chose to run.
Can I Hire People If I'm a Freelancer?
As long as you have your business license, as a freelancer, you can also hire people to help you in your ongoing work. You can hire them for the full term, to help you with completing projects, or you may hire them for the occasional smaller project. The only issue is that you will be the one liable for their payment.
The Bottom Line
So, do freelancers need a business license? Yes, they do. Freelancers are basically a type of business owner - independent contractors who decided to do the work by themselves.
And like every type of business owner, you will need a license for the work you perform. This will make you a proper taxpayer, and you won't be put at risk of tax evasion charges.