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Most freelancers and independent consultants work from home or anyplace else the can get an internet connection and connect to cell towers. But that doesn’t mean they shouldn’t function like an actual business.
Unless what you do is a hobby (in which case you’re probably not in business), you’re trying to generate revenue or income from your work.
That means you’ll want to look as professional as possible so you’ll get taken seriously and protect yourself personally. One way to do that is by setting up an entity separate from you personal identity.
Why Operate Under an Entity
Providing your services under an entity, even if it’s named for you, compels you to act as ‘real’ business. When you’re incorporated or have an LLC, all your business transactions get done through that entity and under its EIN. In general, this offers some basis protection because it separates personal property from business property and dealings.
Unless your mistakes when operating your business are flagrant or the corporation isn’t operating as an authentic business, entities can protect owners from any personal liability for debts of or acts done in the corporation’s name.
Entities vastly differ in their level of protection beyond choosing a name, appointing a registered agent, and registering it with the secretary of state. Moreover, LLCs and corporations, the two most common entities registered by small enterprises, aren’t entirely alike.
Carefully structured, a U.S. corporation is a separate legal “person,” even small or “close” ones owned by an individual or a few people. However, it’s important to select the entity right type for you and your business, though. Otherwise, you won’t get the most benefit from having one.
Choosing, Registering and Operating an Entity
Most people waiver between staying a sole proprietor or setting up an LLC or corporation. That’s because it can get confusing and scary to establish formal entities. It doesn’t have to be, though, as long as you get the basics of launching entities. That takes research you’re using to doing anyway and, today, most of us have lots of legitimate places to turn for help online.
LLC’s, which are passthrough entities, are usually easier than s-corporations, which is another passthrough, or c-corporations to establish. But LLC’s and s-corporations aren’t the same and both can offer fewer protections than a c-corporation. All entity types—which can include partnerships and trust—can be inexpensive to register in most states.
However, they can be expensive to operate, especially c-corporations. Small c-corporations can easily overcome most disadvantages—like double taxation—as long as you get legal, accounting or tax help to achieve that correctly.
You can form all formal these entities in any state as long as you have a registered agent there. But it’s essential to form in a state with good small business laws.
You can search the internet for “states with close LLC or corporation statutes.” Those often benefit you more if you are the sole member of your LLC or shareholder of your corporation.
Personal Privacy and Safety
Remember to use the business address and business phone number strategy above with your corporation and get your EIN under your corporation’s name. Keep in mind different states require different amounts of personal information to set up corporations or LLCs. Some even want social security numbers and home addresses of each owner or officer.
Because you’re trying to protect your personal identity from fraud, you might want to avoid those states, even if it’s where you live. Instead, consider forming your entity in a state that doesn’t require so much personal information.
If you set up a “foreign entity,” that is one outside the state where you operate your business, you’ll need to “domesticate” it in your home state. You do that by getting what’s usually called a “Certificate of Authority” for a foreign entity in your state to operate legally there.
You’ll also need that so if someone takes your business to court, you can fight the suit legally in that state. (Check to make sure the Certificate of Authority doesn’t require too much personal information, though.)
If you’re a journalist, blogger or content writer who does investigative work or writes controversial or offensive content, talk to a media lawyer licensed in your state. They should help you set up the right entity to protect you adequately.
In fact, whatever your profession, know the best entity to form for your business type or state and that’s also where an attorney can help. There are tax and legal implications for all of them.
Banking and Financing
Operating your business as an entity can provide powerful advantages, like the ability to raise capital. Business banks also may offer better banking services as you grow because they’ll treat you as a legitimate business account holder. Having a bank account in your business’ name helps you keep your personal and business finances separately.
That’s essential because you’ll need to avoid commingling those funds to get considered a legitimate business. Not doing so could have legal consequences if you can’t prove you had a legitimate reason for mixing your personal and business accounts.
Coupled with the changes the Trump administration made to tax laws, there may be some changes that come with opening business bank or money payment accounts about requiring your personal identifying information as part of the process.
Government officials argue they need your personally identifiable information to make sure you’re not laundering money or supporting terrorism. So they’re forcing banks to be more aggressive about obtaining information like your physical home address.
These increased requirements are all part of what banks (and Money Services Businesses like PayPal) call their “Know Your Customer” policy. They’re now required to maintain Customer Information Programs, ostensibly to prevent the aforementioned money crimes. Under those programs, if you’re a U.S. citizen, banks now require your social security number for both business and personal accounts.
Keep in mind federal law allows banks to set up their own rules to comply with these regulations as long as their practices don’t violate them federal laws. They have requirements for verifying your business and some banks may ask for documents to identify you personally that others may not.
You’ll need to provide more voluminous documents if you want to get business financing or credit cards so keep that in mind. Also, maintain strong accounting ledgers, know business numbers like your working capital and work to build good business credit if you intend to get loans or a line of credit.
Invoicing and Payments
Not only will you keep your social security number private, you’ll also be more credible to prospective clients when you set up payments under your entity.
On your invoice, you can have a “check mailing address” if they send checks and use your home address or a mailing address closer to your home. That way, you won’t have to pick the check up at your rented mailbox or P.O. box.
Checks get made out to the name on your business bank account. You also can use your business accounts opened under your EIN and trade name for ACH forms clients send.
Hiring Professionals to Help
It’s essential you set up your entity and overall enterprise in the way that works best for your business and protects you. So, talk to attorneys both who understand your industry and small business. How they operate their law firm will tell you much about how they’ll treat your business.
Find licensed accountants with similar qualifications who are experts in small business taxes, particularly if you sell online. Also, find an insurance agent that works regularly with your type of small enterprise who can tell you what coverages you need, even if you work from home or use your personal vehicle.
(c) 2019. Dahna M. Chandler for Get Money Moxie, Inc. All rights reserved. This article may not be reproduced or reposted in whole or in part without express written permission of the author.
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