Getting started: Is a business plan necessary?
You may remember in your High School or College Business class some talk about a business plan. Or maybe you’ve read all the books that tell you how you can’t start a business without one. Well, in my experience, much of that is hogwash for freelancers and one-man businesses. Don’t get me wrong, I think having a business plan in place can really put things in perspective, but is it absolutely necessary for Freelance Design business? Not really, and I’ll tell you why.
First, the number one reason people write business plans is if they need to approach a bank for a loan. If you’re opening a retail shop and need an advance on store space and supplies, then a business plan becomes a necessity. The person who’s looking to open a new Widget Shop needs to show the bank forecasts, expense charts and all sorts of other numbers to prove their business will eventually be profitable. But that’s not what a freelancer needs. I should know – I wrote a 22-page business plan 3 years before it ever began and I might as well have thrown it out the window for all the good it did me. In fact, by the time I left my job for full-time freelance I had completely forgotten about the business plan and only later found it buried in a drawer, clean and pristine.One key to starting your own one-man show is taking it one step at a time while you continue to work for “The Man.” That will allow you to build your business from the ground up without taking a financial toll. Therefore, a business plan to show to your local banker isn’t all that necessary.
That doesn’t mean you shouldn’t write one, though.
Writing a business plan will indeed help you organize your wants, needs and establish your goals and opportunities. It will help you evaluate your current and future worth, show you what tools you need and which ones you can do without for a while, and guide you to where you’d like to take your business in the future. For me, this kind of information wasn’t necessary because I’d been thinking about it for nearly 10 years. For you, as someone who may not have been thinking about it for very long or who just decided yesterday that freelance writing is the coolest job on Earth and a better direction for you, a business plan may help you stay on the right track.
So if you prefer to create a business plan, then write it for yourself, not for anyone else and let it serve as a guide to get you where you want to be.
Taxes. Need I say more?
One thing I was not prepared for was the substantial difference in taxes when you have your own business, and the required "forms" and "ID's" you need in order to keep your business legal via the Fed.
I never realized how easy I had it working for someone else... they just gave me my paycheck, I saw the different amounts of money being removed from my check every month, but never thought much of it other than my occasional groan about how much I would be making if they didn't take out so much. Well, that was nothing compared to managing your OWN business and taxes.
First, get a Federal EIN number. It's quick and easy to get one (visit: http://www.irs.gov/businesses/small/article/0,,id=102767,00.html), and for a sole proprietorship (aka. a one-person show), it's just safter to use a Federal Tax ID number instead of your Social Security number. At this level there isn't much difference between the two, but I personally like to keep my SS# close and, with the amount of forms you have to fill out that require such a number, better to fight against fraud with your EIN than your SS.
Next hurdle, the bank. Is your business under your legal name? If so, you can relax. For all others, prepare for a pain in the patooty. My name is (legally) Eleanor Phillips. My business name is Elle Phillips Design. Because I use my nickname, "Elle" instead of my full legal name, I was required to file for a DBA (Doing Business As) or also called a Trade Name Registration through the state and provide that paperwork to my bank in order to deposit and withdraw from my business account. Oh, and by the way, you WILL be required and SHOULD to open a "business" account if you're self-employed. While you may not be required to open a separate account if you're just doing business as yourself under your legal name, it would behoove you to have one anyone for tax and audit purposes. Keeping your accounts separate really will make life a whole lot easier later on. For example, come tax time, if I have any doubts on a receipt I might be missing or a check that was sent out for business purposes, I can simply go back to my bank account and get the record. The IRS will too, should you ever be audited.
Moving forward, you also need a business license if you're running a business out of your home. Check with your local state or county office, and 99% of the time if you're a freelancer, writer, designer of some sort, you'll be granted a license, but you will want to make sure you have the proper permission to run your business from where you live. As far as I've heard, the only way you might be denied is if you run a business involving other people or chemicals or something of that nature... i.e., hair salon, daycare, etc. Get a business license to be on the safe side. The last thing you want is some kind of fine from the county because you've been discovered operating without one.
More money to be dished out! Register with your state tax commission. Most states are different, so really research what you need to do, but in more cases than not you will be required to pay some kind of state tax. Visit your local state government website for details. Some states require taxes be paid monthly, some quarterly, some yearly. Some require only income tax, others require sales tax.
And here's the final doozie... self-employment tax. If you work for yourself and no one else, guess what? The Fed wants their money and by golly you're going to pay it. If you earn more than $400 per year being self employed, prepare to dish out 15.3% (for current 2010) on income up to $106,000. This percentage covers your federal social security and medicare taxes. THIS IS VERY IMPORTANT TO REMEMBER! If you write a book and profits come in at $40,000, then you will owe $6,120 to the government. Put it aside or pay it right away - just don't spend it!
Save on taxes you have to pay by deducting EVERYTHING.
So while the bad news is you don't get to keep all the money you make, the good news is you only have to pay taxes on your profit, not your gross. What does that mean? It means if you made $50,000 Gross last year, but your expenses came to $15,000, then you only pay taxes on the profit amount of $35,000. That's a savings of nearly $2300 in taxes. So if you buy anything that could be considered for your business, keep the receipt and deduct it! I use Quickbooks to help me keep track of my invoices, receipts, etc. but there are a lot of choices out there and I highly suggest you obtain one of them as soon as you start your business. Take the time to learn the basics of accounting and life will be much easier in the long run. I actually found it kind of fun. I can track who owes me money, how long my invoices have been out, what bills have been paid and when, and I can pull a report at any time on what my current profit and loss for the week, month and year is. I can even compare my income and expenses to the previous year, so I always have an idea of what my taxes will be.
Here's a great little story for you:
My first full year as a freelancer was great. I was making great money, working my butt off, and I watched my savings account fill. Then tax-time came. At the time, I had no idea about the 15% self-employment tax and deductions didn't really matter to me (after all, I'm a designer, not an accountant), so when my accountant came back to me saying I owed the Fed over $16,000 I about had a heart attack. WHAT????? How did that happen? Why didn't anyone tell me I would owe that much??? It's because I was stupid. I didn't do my homework, and I failed to realize one of the most common parts of owning a business: deductions. So I'm telling you now, don't let it happen to you. I nearly closed my doors that year because of it. But then I got smarter. So, to help keep you from making the same mistakes I did, here is a list of things you can (and should) deduct if you operate a small home-based business:
- Office space and everything that goes with it (if you have dedicated 10% of your home to office space, you can also deduct 10% of all your utilities (water, garbage, sewer, etc.))
- Food (you have to feed yourself while you're working, right? So deduct your lunches for the entire year)
- Office supplies (obviously, but be sure to enter the receipts for EVERYTHING that could be construed as office supplies. Buying tape to wrap Christmas gifts? No you're not. It's for your office. Get it?)
- Computer programs and upgrades
- Furniture for your office. This includes your desk, your speakers, the antique-lamp that sits on your desk, file cabinets - even a couch or laz-y-boy if you need a comfy place for your clients to sit when (and if) they come to visit
- Car mileage (if you go to the grocery store to get stuff for dinner and you pick up a pack of pencils (say that 5 times fast) then you can deduct the mileage of the entire trip)
- Travel to visit clients (if you have a client out of state, you deduct everything for that trip!! This means the flight or mileage, any clothing you may need to buy for the meeting, all meals (not just lunch), gifts, entertainment, hotel, car rental, EVERYTHING.)
- Client gifts (if you send thank you cards or a bottle of wine to every client at the end of the year, deduction).
- Charitable contributions (remember to get a receipt for every donation you give, including to the Salvation Army or Good Will)
- Retirement account contributions (last I checked the max amount you can donate into a personal IRA each year is $4,000, and in some cases up to $10,000. That's money you don't have to pay taxes on until you retire.)
Best of luck in your business and more articles will be coming. If you have suggestions or questions, feel free to contact me through my website at www.ellephillips.com.
Visit www.ellephillips.com for more information about Elle Phillips Design. Thanks for reading!
