The COVID-19 crisis has spurred many people to begin offering services as freelancers, whether online or in safe-distance, in-person ways. For those new to freelancing, we offer this guide to key business-law issues that you should understand as a business owner. These are the answers we provide to questions from our own freelancer clients.
Legally, what exactly is a “freelancer?”
“Freelancer” is the common, informal name for what U.S. laws call “independent contractors.” It is perfectly fine to refer to yourself as a freelancer in your advertising materials (website, social media and so on), but the contracts you will sign with your clients should identify you as an independent contractor. This terminology is important for both you and your clients to make clear that you do not have some other type of relationship, such as an employer-employee or joint venturer.
To further clarify the terminology: “independent contractor” can refer to either a sole proprietor (individual freelancer) or a freelancer who has chosen to form a small company through which to provide services.
As a freelancer, do I need to form a company in order to do business?
Short answer: no, but it usually makes sense to do so anyway (and it’s easy and inexpensive to do it).
Legally, there is no requirement that you form a company to provide services (with the exception of a few rare types of businesses that some state laws require to be done by companies). However, there are some compelling reasons why it may make sense to form a company anyway. First, many clients have a strong preference for hiring companies rather than sole proprietors. This is partly because there is a perception that companies are more legitimate than sole proprietors; forming a company signals competence and professionalism to clients. It can also be legally dangerous for companies to hire sole proprietors; it presents risks that a state agency may fine the client, asserting that it was improperly classifying you as a “contractor” in order to avoid withholding taxes and providing benefits.
Forming a company also protects your personal assets from the risks that are inherent in doing business. Your personal assets are often owned jointly with your spouse, so your spouse may appreciate you forming a company, too. To some extent, business risks can also be mitigated by purchasing business insurance. But often the costs of forming a company are comparable to or less than insurance, and forming a company can provide all of the other benefits described here as well.
If I form a company for my freelancing business, what kind of company should I form?
This depends on a number of things, including whether you plan to have a business partner. If you plan to simply be a one-person business providing professional or creative services, the easiest approach is usually to form a single-owner limited liability company (LLC) in your home state. A corporation would be a perfectly appropriate alternative, but all else equal, an LLC usually makes more sense as it is somewhat less expensive (corporations generally require their members to hold annual meetings, even when they have just one owner).
How expensive is it to form a company for my freelance business?
In most states, you can easily find a good local business attorney who can form a company for $500 to $1,000. These costs generally pay for themselves fairly quickly in the form of increased sales and protection of your personal assets.
How long does it take to form a company for my freelance business?
In most states, a law firm can create the company in as little as 24 to 48 hours. Bear this in mind if you have clients who insist that you form a company as a condition of hiring you — it is fast and easy.
Is it a good idea to offer services through a freelancer site like TopTal or Upwork?
As a freelancer, what types of legal documents should I be familiar with?
The legal documents that you most likely will need to be comfortable with are:
- A client service agreement. This is the contract that you will enter into with your clients. It is important because it does a variety of things in one simple document: it provides the road map for how you and the client work together, defines the deliverables you will produce (whether that is commissioned artwork or music, advertising copy, website designs or anything else), sets any deadlines for your work, clarifies who will pay for what and who will own the intellectual property that you often generate as a freelancer, and confirms the terms of your compensation. The actual name for your client service agreement should vary depending on what service you provide: software developers might call it a Software Development Agreement, a yoga instructor might call it a Yoga Instruction Agreement, a copy writer might call it a Creative Services Agreement or Marketing Services Agreement.
- A subcontractor agreement. This one depends on how you work. If you’re a freelancer who sometimes subs work out to other freelancers, you will want your own contract with those subcontractors. Common examples that we see with our own clients include commercial photographers who hire more photographers (or makeup artists or florists) for their shoots as well as software developers who hire other developers for specific coding work or to create art to appear in client deliverables. Note that if you want to use subcontractors, your client service agreement should make that clear.
- A Data Processing Agreement/Data Processing Addendum/DPA (sometimes). This is a fairly new type of document that a broad variety of freelancers are being asked to sign. It is driven by the General Data Protection Regulation (GDPR) and other European data protection laws that have arisen in the past few years; those laws can apply to American companies that have customers or employees in Europe, which means those U.S. companies often need to pass those obligations on to their outside vendors. Freelance software developers will certainly be asked to sign DPAs, but we have clients who are copy writers, content strategists, process designers and others who have been asked for them as well. DPAs’ content varies, but they generally ask you to commit to various methods of protecting information belonging to the client and its employees. These DPAs can look quite intimidating, but it is often possible to persuade clients to waive their request for a DPA if you can show them that the nature of your work presents little risk to the client. This is an issue to discuss with your business attorney.
- Your own company’s operating agreement or bylaws (if you choose to form a company). As noted above, not all freelancers will form a company. If you do form an LLC, the “operating agreement” is the document that governs how it works; do not assume that simply because you are a one-person company you can make all decisions without regard for your operating agreement. Likewise, if you form a corporation, you will need to understand its bylaws (which are internal documents not filed with your local Secretary of State) as well as the documents filed with the state, which most states call a Certificate of Incorporation or Articles of Incorporation.
As a freelancer, what should I know about intellectual property?
“Intellectual property” is the umbrella term in U.S. law for several types of property, of which the types most relevant to freelance service providers are trademark and copyright. Trademark law generally protects logos, product names, company names and slogans; a trademark’s owner can prevent others from using the trademark-protected name, logo or slogan itself or similar names, logos and slogans that consumers might reasonably confuse with it.
Copyright law generally applies to works of creative expression, which can vary depending on what you provide:
- for software developers, website designers and User Experience (UX) designers: source code, object code, UX design elements, many user interface elements, and software applications as a whole.
- for copy writers: the copy you write for your clients (final and drafts).
- for graphic designers: your design deliverables (final and drafts).
- for photographers and videographers: your final, unedited and raw photo files and videos.
As the owner of copyright-protected materials, you can prevent others from using, copying or publishing them without your consent.
Under U.S. copyright law, generally, the freelancer who creates copyright-protected material is the sole owner of that material — and a client cannot use it without committing copyright infringement — until the creator grants the client the right to use it. In most cases a client will insist on owning that work outright, which is done with a clause usually called an “I.P. assignment” or a “work for hire” clause. Alternatively, freelancers may prefer to keep ownership of their work but grant clients a license to use it in various defined ways. This approach is less common, but may make sense for your business, and clients often agree to it if you can explain the reason for this approach. No matter which approach you take, you should address this in a written agreement between you and your client that explains what you are agreeing to do (the “client service agreement” described above).
As a freelancer, how can I protect myself from non-paying clients?
Every freelancer at some point will have a client who fails to make an agreed payment, whether because the client has cash flow problems or (more rarely) is unethical. It happens, but there are some ways to reduce the risk. Common strategies include:
- Demand partial payment in advance. This is the single most effective tip. Do not begin work until the client has made some upfront payment — even if it is merely a $50 payment to confirm that the client can write a check that will not bounce. Many freelancers charge an upfront fee of 25% of the expected total project costs, with other significant payments due at various milestones and a final payment upon completion of the project. There are no right and wrong ways to structure payments — you can do whatever your client will agree to. No reasonable client should refuse to at least pay a small advance fee, although it is also reasonable for you to agree to a refund of the advance fee if you fail to produce the first deliverable.
- If your freelance services involve the creation of copyright-protected materials, your client service agreement can make the client’s use of that work dependent on their complete payment of your agreed fees. As explained above, clients do not gain legal rights to use your copyright-protected work until you assign them ownership or grant them a license. Your client service agreement can make clear that they do not gain those rights if they fail to make an agreed payment. This clause can be a very useful point of leverage against a client who fails to pay a final invoice.
How do I find a business lawyer who can help me with all of these legal issues?
Most business law firms in your home state can easily help you with everything you need to do business as a freelancer. In most cases, you can even work with a law firm in a different state if you wish. How to find a good match for you? Try asking other freelancers, your bank and your accountant. When you call a law firm, do not hesitate to ask about their rates. Part of your diligence as a responsible business owner is managing your costs.
Adam Nyhan represents freelancers, software developers, advertising professionals and other service providers, and the companies that hire them. He is an attorney in the Software & Startups practice group at Perkins Thompson, a business law firm serving clients throughout the United States and in other countries. Adam can be reached by email or by phone at (207) 774-2635.