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Lots of people out there fancy themselves as "web designers"... but the difference between the guy who knows how to roughly format a table in HTML and a professional web designer that makes a living creating websites is tremendous. There are a few key things that you have to keep in mind if you want to truly call yourself a Professional Web Designer, and Shane Pearlman of Shane & Peter Inc. is going to show us the ropes today...
Hi, I'm Shane
I tweet about my misadventures running (with some pretty smart people) a 100% freelance driven agency at @justlikeair. I was in business for two years before I obtained a business license. I simply never realized it was required.
In fact, the only reason I eventually paid for a biz-license was that I landed Boeing as a client, and they refused to award me the project without presenting the document (which has never happened since). It still blows my mind how little I knew or got right in the early days... Lucky for me, I received 1099s from clients, which prompted me to report the income and pay my taxes. I cringe as I imagine what would have happened if I hadn't paid taxes back in the day when I was getting started.
You can start a business the right way or the wrong way...
Like me, you'll probably survive the wrong way just fine... but you will waste money and countless hours. Most of us live in a country that regulates business owners, and the sooner you learn the basic ins and outs (its not bad, trust me), the easier it is to avoid pitfalls and tragedies.
If anyone pays you to design something, in the eyes of the government, you are a business owner. Your odds of success increase dramatically if you see yourself that way and behave accordingly. If you ask the IRS, the purpose of running a business is one thing, and pretty much one thing only - to make
them money. They expect business owners to keep careful records (or pay someone to), worry about things like profit and loss, and offer services and/or sell goods.
First things first, I'm not a lawyer, CPA, nor a small business consultant. I'm just one guy on a team of business owners who has been out there for a little while and has walked the road ahead. So, please check with a professional before making any serious decisions. This is just to help fill the gaps. Things change every day. This article was written in Jan of 2011, based upon our experience as business owners in Santa Cruz, California. Setting up a business may be different in your corner of the world. Want to let us know what was different in your state or country? Leave a comment! Someone will be super grateful.
Setting up Your Business
- Create a Business Plan: How will you make money?
- Pick a Legal Form of Business
- Fictitious Business Name (Optional)
- Business License (if your city or country requires it)
- Zoning & Supplemental Permits
- Home Business Safety Check (Depends on your city)
- Apply for an EIN
- Open a Separate Bank Account
- Professional Certification
- A Few Key Forms
- Track Your Finances
- Marketing & Sales
- Employees, Sales Tax & Things We Don't Know
- The International Perspective
Create a Business Plan: How will you make money?
When someone asks you, "what do you do?" or "what type of business is it?" can you answer in 30 seconds or less? It's called an elevator pitch. Write it down. It will help you focus and you will get asked that question all the time. It is nice to have an answer. There is no law requiring you to have a business plan, it is just good common sense. Would you run a race without a destination or a route?
More than anything, just answer the question "how will I make money?" If you get audited, one of the first things the IRS will look for is a written plan on how you will generate profit. There are many templates online and some good free courses offered by SBDC & SCORE. Some people spend years perfecting their plan, while others take 30 minutes and hand write it on a napkin. It doesn't matter how you do it, just do it, and put it in your files.
Pick a Legal Form of Business
What legal form of business is best for you? For some it is a sole proprietorship, for others it will be an S corporation or an LLC. Both your opines and the answer will differ depending on your state or country. Over the years, Peter & I have owned sole props, general partnerships, and S Corporations.
I picked a sole prop first because it was simple. I wasn't too worried about liability (because I owned nothing and I wasn't doing high risk services). You could sue me for my surfboards I guess, but beyond that you would get much. The paperwork was relatively straight forward (I didn't need a lawyer) and the cost was in my price range (almost nothing). Many people use LLC as an alternative to a sole prop as they behave in a very similar manner. As an LLC, you will have to pay an annual $800 filing fee for the privilege of transacting business in our fair state (which was why I passed on an LLC in my early days).
When Peter & I joined forces, we set up a general partnership. The GP was basically the same as the sole prop, but for multiple people. We laid down a few rules, a partnership agreement saying what happened if any of us wanted to leave, died etc... and we were off. I recommend using a lawyer for the partnership agreement and checking with a CPA.
In 2006, we increased our exposure by taking larger projects with the higher potential for liability (if things went boom). We took on the responsibility for a team of contractors. We bought our own homes. Our legal & financial counsel agreed it was time to set up a corporation. It involved about a month of planning and paperwork, a few hours of a lawyer's and CPA's time and some local and state fees, which all together cost a few thousand dollars.
How do you decide? Start simple. The two big issues are taxes and liability (lawsuits). Sit down with a CPA and a lawyer to discuss your particular situation. One you have decided on your business legal structure, partnerships, corporations and LLCs will need to file the proper form with the state. You might also want to check with the IRS on your federal tax schedule as you may need to pay quarterly taxes (yup it is not just at the end of the year anymore).
Fictitious Business Name (Optional)
In the US, you do not need a fictitious business name for a corporation or if you plan to operate under you own name. So a sole prop called "Shane Pearlman Enterprises" does not require me to submit a fictitious business name.
If you do register a fictitious business name, they will give you the papers you need to open a bank account in the name of the business. Remember, you don't own the name forever - in Santa Cruz County, where we live, it's for 5 years, and it cost us $70. You will also be required to publish the business name in a newspaper within a set period of time, usually 30 days, which cost us $35 last time we did it. To get a fictitious business name, start by looking up what is available. I just typed "Santa Cruz Fictitious Business Name" into Google and the 2nd result was the search form. I then had to make my way down to the county building and sign some forms and pay the money.
It was pretty easy once I knew where to go. Oddly enough, while my business license was at the city, the fictitious business name was with the county (go figure). Might be the same with you or totally different.
Business License (if your city or country requires it)
Depending on where you plan to run your business, go to the city or county office. If you don't know which to go to, check out their website or give them a call.
These days, many contractors run their business from home. Each city/county will have its own rules, costs and paperwork. Oddly enough, Santa Cruz County does not require a business license but the incorporated cities do. If you happen to live in one of the incorporated cities in Santa Cruz County though (Santa Cruz, Scotts Valley, Capitola, Aptos...), make sure you go down to city hall and pay your $150 +/- bucks. Interestingly enough, even though I didn't need a business license when living in unincorporated santa cruz county, I ended up having to get one when some of my larger customer required it. They just didn't believe I didn't have to have one.
A quick tip, when you walk in to fill out your paperwork, they will probably ask when you started your business. The answer is TODAY. Otherwise, they will just make you pay back taxes.
Zoning & Supplemental Permits
There are super high odds this next step will have no affect on you at all. If you happen to design & code software like us, this was a non-issue. But if you do large amounts of screen printing & handle chemicals, your country or city may have specific restrictions and require a permits on some types of businesses. If you want a sign, I guarantee you will need a permit.
Check with your planning department to determine if a permit is required prior to the operation of your business. You should probably also quickly check with them regarding the zoning of the location you plan to have your office and make sure that there are no issues that will stand in your way.
If you sell products, make sure you pick up a sellers permit. Erik Vonk, owner of Back of the Office recently shared a funny (yet kind of tragic) youtube video with me on the foibles of trying to start a business and the permits you need in the United State.
Home Business Safety Check (Depends on your city)
The first time I got a business license in Santa Cruz, they required me to get a safety inspection from the fire department. I had the honor of paying $200 dollars for this, and I'm glad to know I'm safer for it. They didn't mention it when we paid for our most recent business license 2 months ago, so I do not know if that is still in effect. Super unlikely you will have to deal with this, but I figured I'd mention it.
Apply for an EIN
An Employer Identification Number (EIN) is required for a corporation, partnership and anyone hiring employees. As far as metaphors go, this is like a social security number for your business. It will get used to identify your business for everything. Sole proprietors do not need one and often use their social security number for the purposes of federal and state identification. Some people get one even as sole proprietor to sharing their social security on every form a customer hands them.
Open a Separate Bank Account & Credit Card
Like the business plan, one of the main key identifiers the IRS looks for in a business owner is the separation of their personal and business finances. You should ALWAYS keep your business money in a separate account. If you plan to use a credit card, then open a separate one and use it just for business. This is incredibly helpful when it comes to bookkeeping and is pretty much required by the IRS. It is the #1 reason that the IRS kicks a business owners ass.
Some industries are not policed what so ever. When you hire a designer or programmer, it is mostly based upon word of mouth referral, perhaps a client list, a CV, or just sheer personality. Many industries have organizations that police the quality of its service providers. In some cases, your industry may require a certification to even be in business. You can't practice law, perform acupuncture or build a house in California (legally) without passing the proper state exam.
This often has quite a lot to do with the significant level of liability inherent to the field. Other industries have certifications that increase the value of your business in the eyes of the customer, but are not required to be in business. Cisco Networking certifications are a great example.
A Few Key Forms
Every customer in the US eventually asks for a W9. I have a pre-filled one I keep on hand and am now in the habit of simply sending it with our first contract and invoice. Need a blank, copy? Got you covered.
If you haven't done so yet, you will be sending out invoices. They contain the basic information clients need in order to pay you. I cannot overstate how often I receive invoices from contractors that are missing key details, and as a result can't be processed. And I'll admit that quite often, after some digging (especially with large companies), I discover that the payment is late because I messed up my invoice.
So, what goes in a proper invoice? Read this article to find out.
There are a few types of contracts you may encounter. A project contract, a Non-Disclosure Agreement (NDA), and an Master Services Agreement (MSA).
I'd recommend putting together a basic project contract of your own. Think of it this way, when eBay hands you a project contract written by their lawyers, whose best interest is that document geared towards? Definitely not you. Now, you may end up having to accept a large company like eBays's contract (don't be afraid to negotiate terms), but quite often smaller companies will accept yours.
If you don't have a contract of your own, you can borrow our template to get your started.
A master services agreement is a broader contract covering the entire relationship. You will sign this when you work on larger projects or longer relationships with bigger companies. We also use ours to manage our relationship with sub-contractors. If you plan to use freelancers yourself, you should probably keep one handy.
If you don't have an MSA of your own, you can borrow our template to get your started.
You'll notice that we merged out NDA into our MSA. This is common practice, although quite often you will be asked to sign an NDA before ever engaging. Whether or not to sign an NDA is always a big debate. We prefer to avoid it, as we do a significant amount of R&D and have realized over time that the brilliant and unique idea you have, is neither all that brilliant or unique. It all comes down to implementation. Sometimes it is unavoidable though.
Track Your Finances
The disadvantage in the US of self employment is that you have to pay both halves of the employee's portion of payroll tax (typically split 50-50). This ends up about an additional 6-7%. The great advantage though is that you can deduct all legitimate expenses including cost of home office.
Tracking you business expenses often pays you better than a project would. I learned a huge lesson when I first went to a CPA... He saved me close to 10k in taxes. Mostly it was education, teaching me what I could and could not deduct. Mileage on your car is the other item to track. At 40 some odd cents per mile, that adds up crazy quick.
I can't tell you how many open invoices I forgot in my early days and never my collected money. Using an application like quickbooks or a web app like freshbooks to keep track of them is a must. The more information you have about your finances, the more likely you can make wise decisions.
Marketing & Sales
There are a million awesome articles on the web about how to market your business. The basics are a business card & a website. This is not field of dreams. Just because you built it, does not mean the clients will come. You need to leave your house and meet people (or the online equivalent). That is how you will find clients. You are going to have to learn some sales.
Sales Tax, Non-Owner Employees & Things We Don't Know
There are plenty of things that you may have to do that we have not. We don't sell goods, we primarily use contractors and have no employees aside from Peter, Reid & myself. So if you learn something we missed or that I should update, please let me know - I'd love the input.
The International Perspective
I was curious how different this really is across the globe, so I sent the list to people on our team across and outside the US, and got some interesting variations. Surprisingly, it is quite similar in many ways, and extremely different in others.
The USA (not california) | Erik Vonk | Back of the House
The business license or permit is an interesting aspect in all this, because the rules and requirements vary ( a lot! ) by State, by County and by Community (City, Town or Unincorporated area). We here at Back Of The House have a special ‘business license & permit compliance research process’, developed in conjunction with law firms, that we use to determine what licenses and permits are required by whom for what.
[quick note from shane - Erik and his team have a company that navigates the bureaucracy for you and helps set up your business. Pretty cool service. Think Alfred to your Batman. They also handle many of the back office tasks if you want to focus on design rather than the chores of business.]
The Netherlands | Philo Hermans
When you register a company in The Netherlands, and you choose the company type "Freelancer" a tax id will be requested automatically. If you are registering a large company you must manually request a tax id. When you register your company you get your own company number that you need to add on all your invoices, same goes for the tax id. So that might be the business license, without the so called "KvK number" you can't get a tax id since your not a registered company.
We only get a tax id if the government thinks your earn enough. If you estimate your total earnings like €1000 in a year you won't receive a tax id. As for a formal business plan, as a freelancer this was not needed. If you are starting a large company you will need to fill out a business plan form of 25 pages or something.
The business type I choose is "ZZP'er" also known "Freelancer".
The category I've chosen was "software implementation" with an extra description "web development".
Canada | Matt Wiebe | Soma Design
I didn't need a license, just a business number. Here, a biz license only applies to people selling goods.
The Goods & Services Tax (GST) is required on every service, but the great thing for a freelancer is that you don't have to start charging for it until you make $10,000/quarter or $30,000/year, whichever comes first. This means that you can start working and worry about this a little later. Also, GST is only charged to Canadian clients, giving you a competitive advantage when working with foreign clients. Every province has its own provincial sales tax with its own rules and regulations, so you'll want to check with an accountant to see if you need to charge for your services.
Serbia | Vladimir Kokovic
here is the process in a few steps of how this works in Serbia. You pick a company name, then go to official/national agency for company registration. You pick the industry type/work type, and fill the rest of the form (including details of getting your official banking account) and that's it, or that should've been it. Taxes work quite easy, you pay 18% VAT, about 40% of each employee salary as addition in order to have your employees' health and retirement insurance. The authorities want to know pretty much everything about your business so you are expected to track all your sales, agreements, tax invoice copies, earnings, and it is much easier to hire a third party person to do it for you, which will cost you near 150-250e in the beginning, additionally (depends of amount of sales). And finally, you can choose to find the office, which might cost from 150e up to a few thousands of euros - this is your call. These would be official requirements to start a business in Serbia. However, there are some unofficial rules; Learn English as much as possible since Serbia became very popular for software development outsourcing and contribute to your job as much as possible.
Australia | Ben & Tom | Typeshape
In Australia when starting as a freelancer, you'll most likely be entering the business world as what's defined as a "Sole Trader". You'll need to get yourself an ABN ( Australian Business Number ) which is used on all your invoices as your identifier. Australia also has a GST ( Goods & Servcces Tax ). If your plans show you'll be earning over $75,000 in the financial year you will need register for GST and start adding 10% to invoices for Australian based companies. The amount you collect from each invoice must then be paid quarterly to the government as part of your BAS ( Business Activity Statement ) return. If you're going to trade under anything but your own name you'll need to register that as a business in the state you are located.
Find Out More...
This is just the tip of the iceberg in terms of starting up your "official" career as a web designer. We've hit some of the major legal points, but we'd be remiss if we didn't mention the awesome library of resources over at our sister site, FreelanceSwitch! Here are just a few topics you an get started on over there:
- Getting Started as a Freelancer
- Pricing Your Services
- Finding Clients & Jobs
- Dealing with Clients
- Getting Things Done
That's it for now folks! We'll be releasing more of these articles on the "business of web design" in the future, so post any requests or questions that you have in the comments area!