I started my .NET consulting firm with a $35 check for a business license and a drive to city hall. I didn’t worry about anything but writing code and meeting deadlines. I can’t say it was a bad way to go.
Until you have someone willing to pay money for your services, the tasks below are a waste of time. My advice is to be prepared to get the process started, but don’t rush out and spend hours researching and implementing these steps until you’re sure you have a viable business. And by a viable business I mean you have sales.
This advice is intended for someone looking to become a freelance software developer or web designer (or looking to start a small web design/development/consulting firm). If you intend to seek venture capital then move along…these aren’t the droids you’re looking for.
Disclaimer: I’m neither a lawyer nor an accountant. I have opinions on starting a business only because I’ve been through it once or twice. Please seek the help of a trained professional for help with starting your business. Also, the advice about business structure and DBAs applies only in the U.S.
Business Structure
You need to decide between an S-Corporation, an LLC, and a Sole Proprietorship.
Don’t even think about a C-Corporation. They come with a ton of complexity and double taxation (where earnings are taxed twice because the corporation pays income tax on its profits, and you pay income tax on what you draw from the corporation). It’s not worth the complexity unless you plan to pursue venture capital.
For the sake of the remaining 4 minutes and 42 seconds I’m not going to describe the other three options in detail when you can read about them on Wikipedia: S-Corp, LLC, Sole Proprietorship.
The digest version:
- A Sole Proprietorship is by far the simplest, but provides the least amount of liability protection.
- An S-Corp provides slightly more protection but quite a bit of headache at set up and tax time.
- An LLC provides the most protection and is fewer headaches than an S-Corp, but you can’t grant stock options and VCs won’t fund an LLC.
I run a very small shop and I’m able to track my finances using online banking and Excel. To eliminate the need for additional bookkeeping I’ve remained a Sole Proprietorship for five years, but I am making the move to an LLC in 2008 to reduce my liability.
No matter the direction you choose, hit LegalZoom to file your papers. And be sure to find a good accountant (see below).
DBA (Fictitious Name)
DBA stands for “Doing Business As,” and is also referred to as a Fictitious Name because…well…it’s a name you made up.
If you use your “real” name as your company name (i.e. Rob Walling), or your “real” name plus a description of your line of work (i.e. Walling Consulting), then you do not need to file a Fictitious Name statement.
If you choose to use a fictitious name for your company do an online search to ensure it’s not already taken within your industry. Any common name you choose will likely be used by someone else, but as long as they are not operating in the geographic area you plan to target, or in your industry, you’re in the clear. I would hit Google for this kind of search.
The next step is to make sure the name is not trademarked. LegalZoom can also help with this, or it appears you can do it on the US Patent Office website (although I wasn’t able to figure out how to execute a search).
Next is your fictitious name statement. The idea is to place an ad in a newspaper or other periodical announcing your use of the name, and a few weeks later you’ll receive a certificate indicating you went through due process. It doesn’t mean you’ve trademarked the name; it just means you can go into a bank and open an account in the name of the business.
For this one I would also hit LegalZoom.
Resale License
I obtained a resale license many years ago for a comic book business I started with my brother. These days, as a software consultant, I don’t have one.
If you need a resale license to buy items at a discount (some wholesalers require one to prove you’re not that pesky “general public”) or to avoid paying sales tax up front (since you will charge the tax directly to your customer and remit it to your local governing body), hit LegalZoom or call your local city hall.
Advisors
You’ll need a few people in your court as you start and grow your business. You would not believe how helpful it is to have a long-term relationship with a good team of advisors. Before I found my CPA, Lawyer, and Insurance Agent I had no idea what I was missing.
Required: CPA.
Under no circumstance are you to do your own taxes. Don’t go anywhere near a copy of TurboTax. Do not skimp on a CPA. Try to get recommendations: talk to your mortgage broker, banker, or friends who own businesses. Don’t settle for someone you feel so-so about. Be picky.
Depending on your locale, taxes for a Sole Proprietorship will run $400-$600. From what I hear taxes for an LLC will run $600-$1,000.
Optional: Lawyer.
I used a lawyer to create a personal estate plan, and since then I’ve used him as a resource. He either answers my questions or refers me to someone who can.
Optional: Insurance Agent.
I have an insurance agent I use for personal insurance needs, who has come in handy on many occasions when discussing my business needs (liability insurance, etc…).
Health Insurance
If you have a working spouse by all means take advantage of their insurance. If not, see if Kaiser is available in your area, or hit eHealthInsurance. Health care is absurdly expensive, so be prepared to pay $500-$1,000 per month for decent family coverage.
Other Insurance
It’s common to wonder if you need Errors and Omissions insurance. This depends on the kind of clients you’ll be working for and the likelihood that you will be sued. Most solo developers I know do not have E&O insurance, as it runs $1500-$2500 per year. It’s up to you to decide how comfortable you are with or without it.
Another option is to get a personal umbrella insurance policy that provides a pre-specified amount of coverage if you are sued. This type of coverage will only help you if you are a sole proprietorship.
Banking
This is critical: open a business checking account using your company name. This allows you to write business checks with your business name on them (does anyone actually write checks anymore?), to cash checks made out to your business, and to easily set up a PayPal or merchant account.
Do not skip this step.
Not only is it a good check to ensure you’ve set up your business correctly since a bank will not allow you to open an account without the proper business documentation, but it’s one of the first questions the IRS will ask when you try to write-off business expenses.
Credit Card
Get a business credit card to track expenses. Advanta has screaming low rates, great cash-back percentages, and they’re geared towards small businesses. You can even get additional cards with spending limits, and all purchases are tracked separately for each card.
Get an extra card for your spouse and put a $1 spending limit on it. He/She will think it’s hilarious.
How Much to Charge
Sigh. So much has been written on this subject. The right answer to this question is: what the market will bear. Do your research. Until you’ve differentiated yourself you will be at market rate, which is probably less than you’re worth if you’re taking the time to read this post.
As you invest in self-marketing this rate will rise as people come to you instead of the other way around. The first time this happens you will fall out of your chair. Take it as a sign of demand.
One mistake I see many freelancers making is charging too little. If you always have too much work then raise your rate until you have a more reasonable workload.
Contracts
Check out Docsketch for getting your client documents signed faster. It’s a much better experience for clients than asking them to print, sign, and email back. Docsketch also has free contract templates you can have a lawyer customize for your business.
Retirement
I’m not going to guilt you into this one, but if you are considering becoming a freelancer and not putting away at least 10% of your annual income into a retirement account, email me and I will convince you why this is a terrible idea. Bottom line: save for retirement.
Vanguard is leaps and bounds above other investment firms I’ve used – they have low rates, excellent performance and amazing customer service. I honestly don’t know how they do it.
Read up on the SEP IRA and SIMPLE IRA. I’ve used both and they are both great tax shelters.
Source Control
You don’t want to be a server administrator. With the number of patches coming out these days, initial configuration, backups, upgrades, repaves…using an old desktop as a source control server is more trouble than it’s worth. It will run twice the cost of a hosted solution in maintenance hours alone.
And don’t forget what happens when something breaks and you don’t have time to fix it. This will happen.
My recommendation for those seeking simple, cheap source control is to open an account with DreamHost (careful, I get some referral money if you click on that link) and use their free Subversion add-on. I’ve been using it for going on 18 months and it’s brilliant. Fast, reliable, no hassles.
If you have to use a Windows-based solution such as Vault or VSS, get a Virtual Private Server (VPS) from someone like HostMySite.com. A Windows VPS starts at $40/month and I’ve had nothing but good luck with HostMySite.
Time Tracking
I have two favorites: SlimTimer and ClickTime.
Bug Tracking
I’ve tried several free tools and couldn’t get past the learning curve or the maintenance issues. I have finally settled on Hosted FogBugz and have never once regretted the decision. Talk about great customer service and painless bug tracking, collaborative spec authoring, customer support, project management, software estimating, etc… It’s not cheap, but the time and aggravation you save will pay your FogBugz bill 10x over.
My five minutes are up! If you have questions or comments you know what to do.
