This article originally appeared on the Freshbooks Blog on March 10th, 2015
Freelancing is often spoken of as the “Wild West” of the employment world. Freelancers “go rogue,” and they “ride off into the sunset” to enjoy their new lives of unparalleled freedom and opportunity.
But the problem with this common perception isn’t just that it’s usually wrong (just ask any working freelancer how long flying by the seat of your pants will keep you in business!). It’s also that this mentality prevents many new freelancers from seeking out the legal guidance and documentation needed to launch their businesses correctly – putting them at risk of future fines and litigation.
Whether you’re a total newbie or an experienced freelancer, making sure that you have the following documents on file – as applicable to your situation – will help keep your company safe:
Document #1 – Business license
Ironically, we’re starting an article on the legal documents all freelancers need with one that doesn’t actually apply to all businesses. But if your company is subject to permit or license requirements, it’s so important that you have them in place that we’ve decided to include these documents here anyways!
Business permits and licenses come in many different forms. In some areas, you may be required to have a general business license from your city or county to run a company. In other cases, your profession may dictate your licensing requirements – plumbers, contractors, estheticians and accountants are just a few of the freelance occupations that require a permit to demonstrate proficiency.
Whatever type of business you’re launching or wherever you live, check with the websites of your city, county or state to understand your permit and licensing requirements.
Document #2 – Business registration
You’ll also want to be sure you’ve registered your company according to your desired structure and the rules governing business registration in your area. Though there are many potential freelance business structures, most fall into the following categories:
Sole proprietorship. Registered on an individual basis, a sole proprietorship allows you to register a “doing business as” (DBA) name for your freelance service.
Partnership. If you’ll be working with a business partner, this business registration structure provides you some legal protection, but does come with additional tax reporting requirements.
Limited liability corporation (LLC). An LLC can be formed by a single person or multiple parties, but serves the purpose of protecting the owner’s personal property in the event of legal action without the effort involved in registering a full corporation.
C corporation. This common form of corporation isn’t often used by freelancers, as it requires extensive filing and taxation documentation, and can lead to double taxation of company earnings.
A small business attorney is the best person to advise you on choosing a business structure, while your city, county or state’s website will tell you how to register your new company.
Document #3 – Company bylaws or operating agreement
If you decide to structure your business as a C corporation, you’ll be required to have company bylaws on hand. If you go as an LLC, you’ll need to submit an operating agreement with your business registration (in most states). Templates for these documents are widely available online if you need help getting started.
But even if you don’t meet these filing requirements, it’s not a bad idea to outline your company’s structure, ownership and policies in some type of document. Even if it’s nothing formal, thinking through these important issues up-front can help you to identify and resolve potential complications before they become major challenges.
Document #4 – Project contract
Once your business is licensed and registered, your next priority should be the creation of a project contract. Too many freelancers operate on emailed assignments and “handshake promises,” but these mechanisms won’t protect you in court if something goes wrong with a client.
Your project contract doesn’t need to be packed with complicated legalese – it just needs to contain the following elements:
The scope of the project
Any important deadlines
How and when payments will be made
Who will retain ownership of the finished product
What marks the successful completion of the project (or, how will the project end if one party needs to cancel early)
Go into as much detail as possible when drafting your contract. For example, don’t just include the amount you’re billing for the project as stated, include any other charges you may assess, such as late payment fees or additional costs for project scope changes. It may seem time-consuming to put together a good project contract, but once you’ve done it the first time, you can use your new template again and again – protecting your business each time it’s used.
Document #5 – Invoice
You’ve probably already guessed that, at Freshbooks, we’re pretty big on invoices. Having an invoice increases the odds you’ll get paid compared with not issuing a formal invoice, though there are a few techniques you can use to up your chances of getting paid on time even further.
Based on our analysis of the tens of thousands of invoices paid through our system, we can confidently state that your invoice should include the following elements:
A polite, genuinely appreciative message. When analyzing invoices, we found that a kind message like “Please pay your invoice within fifteen days” or “Thank you for your business” increase the percentage of invoices that were paid by an average of 5%!
“Days” versus “net.” Minimizing confusion will keep your invoice at the top of your clients’ “to-pay” file, so state your payment expectations in days due (for example, “within 15 days”) rather than net terms (as in, “net 15”).
Include late payment interest charges. Ironically, we’ve found that including a late payment fee on your invoice results in your invoices being paid slower, but with a higher percentage payment rate. Use your judgment here. If you need the cash right away, skip the message, but if you can wait a while, include it to improve your odds of getting paid.
Document #6 – Non-disclosure (NDA) or confidentiality agreement
This recommendation won’t necessarily apply to all freelancers, but even if you don’t need to provide them to clients yourself, there’s a good chance you’ll encounter them and be asked to sign them as you work with customers.
Essentially, both of these agreements protect the privacy of any sensitive information that’s exchanged between your company and your customers. If, for example, a client had to provide you with their financials throughout the course of your work, you may be asked to sign a confidentiality agreement. Alternatively, if you bring on an independent contractor to help develop the game you’re building as a freelance coder, an NDA will prevent the contractor from sharing your idea with others.
Document #7 – Independent contractor agreement
Finally, if you find yourself in the position of working with independent contractors, consider putting a legally-binding agreement in place that captures the details of your arrangement in a central location. Much like your project contract, your independent contractor agreement should describe the nature of your work, how much money will be changing hands and what your expectations are in terms of deadlines, final ownership and more.
While you can find templates for many of these documents online, it’s still best to consult with a small business attorney to be sure your forms will stand up in court. Yes, doing so may be expensive, but your attorney fees will be small potatoes compared to what you’ll pay in fines and litigation fees if your company encounters any legal issues that your documents can’t resolve!
What other legal documents do you have in place to protect your business?
FreshBooks is the #1 cloud accounting solution designed for small business owners. They help everyone from the most fragile of businesses (many of them one person, first time owners) to the most vibrant businesses, collecting billions of dollars. FreshBooks is designed for service-based businesses. They uphold a longstanding tradition of providing extraordinary customer service and building a product that helps save customers time, pursue their passion and serve their customers.