Debate rages around the liability freelancers accept when they agree to contracts that hold them liable for their words using indemnity clauses. Other contract terms related to confidentiality violations, libel or defamation committed while writing give freelancers pause.
Wanting to protect their business or personal property in lawsuits related to business activities, writers can establish an entity with a state government agency. You can choose among multiple business structures but most common for freelancers are the LLC and a corporation, especially an S-Corp. The best thing is the U.S. Constitution allows you to launch an entity in any state in the union.
But you must comply with that state’s laws and rules for keeping it legally operating. You also must register your entity as a “foreign entity” in the state where you operate your business if that’s different from where you formed the entity. That’s just one of many things you need to consider when you form yours.
Wrap your brain around entity formation and maintenance.
You focused on your business requirements and the business you’ll conduct when you launched your entity, but that was the easy part. Managing and maintaining it to keep it legitimate requires a solid business owner mentality.
“Being a business owner requires a different mindset and different skills than being an employee,” asserts Georgia small business attorney, Frank Goldman. “A freelancer must handle not only whatever responsibilities come with typical job duties, you also must confront the obligations of company management, such as filing taxes, getting business licenses and doing the books,” he adds.
Goldman also encourages freelancers, saying, “many people ultimately thrive as business owners” by taking charge of this aspect of running their business. Here are some tips to maintain your legal entity responsibly.
Good reasons beyond freelance contracts to form an entity
Most freelancers only consider contract concerns when establishing their entity. But there are other ways freelancers could face legal liability operating a business, so Goldman provides other scenarios where forming one might be necessary.
“Once a freelancer hires employees or derives most their income from freelancing, then it’s a good time to consider forming a business entity.” Goldman, who serves businesses in the Peach State, also recommends freelancers consider how controversial their writing might be when considering business operations.
“If you own a separate business that does something other than writing, then setting up an entity for freelancing activities to protect the other business from potential liability incurred because of the freelancing activities make sense,” he says.
Contract protections and taxes drive freelancer entity setup.
The primary motivations for most freelance writers for forming an entity is writing agreement issues and finances. Solo public relations practitioner, Michelle Hujber, says “Others in the business community strongly advised me to form an LLC for my protection.”
Diane Kelly Levey, who launched DKL Content Services, Inc., late last year adds, “I think my business can be subject to liability — especially as a health and fitness writer.” She now operates as an S-Corporation, which also helps her separate business and personal expenses and reduce taxes.
Hujber, who primarily writes content, asserts her liability is small, limited to allegedly breaching a non-disclosure agreement or a car accident while visiting a client. But, she says establishing an LLC provides her additional benefits.
“Adding ‘LLC’ to my business name, Hujber Public Relations, makes me feel more professional, and clients respect that I’m operating as a business,” she says. “I am selling the services of the company rather than those of an individual, which also leaves me the option of bringing in subcontractors to help me fulfill contract deliverables.”
Levey says, “I’m working on introducing myself as a business owner after investing in forming an S-Corp because it makes me think differently about my services.”
Liability protection is automatic but not absolute.
Typically, these entities are separate “legal persons” from you, the owner. That means you’re shielded from personal liability for the business debts and obligations if your business is an LLC or corporation. But legal entities aren’t just “set it and forget it” for their protections.
If you don’t operate your entity properly, you’re setting yourself up for failure if you face legal trouble. Whatever your motivation for forming your entity, you must maintain formalities to preserve the protections yours can provide you. That’s because, as New York media attorney and former writer, Mark Fowler, told Columbia Journalism Review in a November 2017 interview that, sometimes, an LLC is “really just an alter-ego” you write under your legal name as a byline.
That means, if you or your business gets sued, the courts may consider your entity just a separate part of your personality rather than a separate legal person. If that happens, the court may find in favor of someone suing you or your business.
Where you form your entity and where you operate your business might lead to differences in how those laws get applied. So, it’s important you check with an attorney on how liability protection works where you are. Talk to your attorney about whether your states require you to issue shares and keep a corporate minute book with bylaws and resolutions for your corporation or a company minute book with an operating agreement and consents for your LLC. They also should inform you about other obligations you have in your state for proper entity operation.
Meanwhile, here are formalities to observe and other steps to take to keep yourself and your business the most protected with your entity:
1. Keep your entity alive.
“Anyone who forms or manages a business entity must keep it current,” Goldman states. He says keeping your entity alive or from getting “administratively dissolved” by a state for not maintaining it properly is usually fairly easy for most freelancers. That’s because their enterprise is a solo endeavor or micro-enterprise with under five employees.
Once you create an entity, you’ll apply for an employee identification number (EIN), also called a taxpayer identification number (TIN) from the IRS. You can do this “working with either your attorney, tax advisor or even on your own,” he explains. You typically elect whether to get taxed as an LLC or as an S-Corp. You’ll want to discuss this with your accountant or tax advisor since your business and personal financial requirements factor into that decision.
In many states, you’ll get a corresponding state identification number. “In Georgia, if the business has employees, you also have to get a State Department of Labor number,” Goldman continues.
Among the most important formalities are filing annual reports and paying annual fees or taxes with the state where your entity got formed and the state where you operate, if the two aren’t the same. It’s essential you do this on time or face delinquency and, perhaps, fines.
States also require you to maintain a registered agent in your entity registration state. That’s a person or business that can accept service of process or official, usually government, mail on your behalf and forward them to you. Not maintaining a registered agent could cost the state to dissolve your entity. It’s important to avoid this because reinstatement can get difficult.
While some states allow you to make yourself registered agent, that means your address needs to be publicly available. To maintain safety and privacy and to prevent business identity theft, pay a professional registered agent to render that service.
2. Don’t commingle your personal and business accounts.
Once you have an entity in place, don’t use your personal bank accounts, including credit cards if you can avoid it, to make and receive business payments. Using personal and business funds and accounts interchangeably is commingling. Neither Hujber or Levey do this. “I opened a business bank account and credit card,” Levey says.
Courts and taxing authorities frown on this and often use it to disregard your entity, called “piercing the corporate veil,” and all its personal and business protections in lawsuits. “The more one commingles business and personal funds, the more likely that there will be attempts to pierce the corporate or company veil,” explains Goldman.
That could make you personally liable for the business’s finances and other business operations — as if you had no entity. While this is less likely with a properly formed entity owned by a small business or solopreneur, it’s possible, especially when you try chicanery. “Another example is when the business, facing a potential adverse judgment, transfers assets from the business to its owner to hide the assets from collection,” he continues.
“I used my LLC’s EIN to open business bank accounts,” says Hujber. Use your entity’s EIN to open business bank accounts and set up services like PayPal or Stripe in your business name. Deposit all payments to your business to your entity’s business bank or business PayPal accounts. Transfer money from your business PayPal account for a corresponding business checking account.
Goldman says if your LLC has more than one member, “Most banks will require you to show an operating agreement.” Banks require proof of your entity’s existence and good standing from the formation state and its EIN, so have that documentation available with updated address and other contact information.
3. Sign all contracts on behalf of your entity.
“Once you create an LLC or corporation, then do business in the company name,” Goldman says. Send invoices and get contracts in the company name and properly execute those contracts.
The signature block for all freelance contracts between your enterprise and clients contain should your business name with the entity designation (e.g., “LLC” or “Inc.”) after that name and a place for you to sign and identify your officer title. Sign with your name and officer title (usually President, Treasurer or Secretary). Signing a contract like you’d sign physicians forms makes you, instead of your business, individually liable for fulfilling the contract’s terms.
4. Register properly in your state.
Besides a foreign entity registration, if you operate your business in a state other than where you formed your entity, Goldman says, “You also may need a business license in whatever municipality where you’re operating.”
5. Pay taxes and debts your business owes.
Ensure you talk to your accountant or attorney about all the tax accounts you’ll need as a registered entity and under which circumstances your business will owe tax. This includes state and federal income taxes, sales taxes on goods and services where they’re required, and employment taxes.
Pay debts owed to subcontractors or vendors who’ve met their obligations to you, too. Otherwise, your business could get sued and, with taxes, governments have won the right in court to pursue business owners individually to get paid. That could wreak havoc on your finances, especially if they attack your personal properly to satisfy business tax debt.
Avoid nonpayment issues by keeping good accounting records for your entity.
6. Get qualified licensed professional help.
Both Hujber and Levey work with professionals in areas where they don’t have expertise — law and accounting. “While it’s possible to form your own entity without attorney or accountant help, it is always wise to have them as advisors,” he explains.
Accountants help you decide whether your business elects taxation as a sole proprietor LLC like Hujber’s or S-Corp like Levey’s, then can assist with filing federal and state tax returns. An attorney helps with drafting of Articles of Organization for an LLC, or Articles of Incorporation for a corporation, and with drafting of well-crafted operating agreements or bylaws.
“In most states, an attorney must represent a business in court,” adds Goldman. “Business owners, with certain exceptions, cannot go to court on the business’s behalf unless they’re a licensed attorney.”
7. Consider liability insurance.
There are various types of insurance coverage freelancers should contemplate getting to protect themselves from lawsuits because having an entity might not be enough. Those coverages depend on what services you provide and what you want to protect but include media perils, errors & omissions, a business owners policy (BOP) and cybersecurity.
Talk to a licensed insurance agent about what coverages you’d need, what they’d provide, especially legal and business restoration help and what your investment is for the policies. The insurance agent also should specialize in insurance for journalists if you want that coverage.