Okay, so freelancing is not all fun and games. There are some administrative things that you have to take care of. For most jurisdictions, this won't amount to a lot of your time and some can be outsourced. But, unfortunately, we as micro-enterprises and solopreneurs have to be administered and regulated somehow!
We're going to share with you our experiences dealing with the UK and US requirements for freelance consultants. However, consultants in many other jurisdictions face similar requirements. We're not accountants or lawyers so please receive this blog post as us sharing our experiences. Always do your own due diligence and seek legal and accounting advice locally if needed.
Setting up: Sole trader
Many jurisdictions have a legal status for independent workers or liberal professions. In our experience, this generally means you are the business, you're personally liable for any debts that you incur, and your revenues minus your expenses are your net profits that you will be taxed on (in the same way employees' income is taxed). This is generally the simplest way to begin freelancing and at least in the UK and US can be done at minimal cost.
In the UK, a "sole trader" (also the term used in Ireland, Australia and New Zealand) refers to an individual who owns their own business and retains all the profits from it. When starting as a freelancer, you simply complete a straightforward registration with HM Revenue and Customs as self-employed for tax and National Insurance purposes. You will be responsible for maintaining business records and submitting an annual tax return for all income from self-employment and other work. It is also possible to set up a partnership in the UK as in other jurisdictions.
In the US, there are no formalities that must be followed to start a "sole proprietorship" (also the term used in Canada). There are, however, requirements to register a "trade name" at the state level if you're planning to name your business something other than your own legal name. There are additional requirements if you plan to hire employees but to get started it's all quite straightforward and you'll report profit under your social security number.
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Setting up: Limited company
Another way to set up as a freelancer is to incorporate a company with you as its sole shareholder and director. This is a "limited company" This generally means that you trade under a separate legal entity, which itself is responsible for liabilities. The company has additional reporting requirements and generally subjected to corporate taxes. You, as an individual, then draw money from the limited company through a combination of salary (since you will be employed by the company), dividends and "loans".
This tends to be a more complex way of establishing yourself legally and I discovered that some of my clients prefer to contract sole traders to limited companies. However, it can offer greater legal protection and tax efficiency advantages (depending on the jurisdiction).
In the UK, it's very easy to establish a limited company quickly at a minimal cost. I run all my consulting work as a sole trader but I've previously established a company using Companies Made Simple, which offers a company setup service from as little as £15.99 (plus tax). You can also use their company address in London and they will scan and email you any post that you receive.
In the US, you can form a Limited Liability Company (LLC). Most states require you to register with the Secretary of State’s office, a Business Bureau, or a Business Agency. You'll need a registered agent in your state before you file tax returns. A registered agent receives official papers and legal documents on behalf of your company.
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Bookkeeping and accounting
Many jurisdictions, including the UK and US, make it fairly easy for sole traders to file taxes. You simply keep track of your revenues (usually invoices issued to clients for services provided) and expenses (e.g. travel costs, office equipment costs, etc.). Software like Xero and QuickBooks can be used in the UK, the US, and other countries to run the bookkeeping and accounting side of your business and they have tutorials to help you do so. There may be additional requirements for companies.
In most jurisdictions, at the end of the tax year, you will file a tax return to tell the tax authority how much you earned and spent. You will likely pay tax on the difference (net profit). In the UK, like in other jurisdictions, you will also have the chance to make social security contributions ("national insurance" in the UK) so that you can benefit from the country's social welfare system (in the UK, you can get sick pay, national pension, parental leave, etc.).
If all of this sounds boring and overly complex, then hire an accountant. In many countries, an initial consultation is free and can already give you insights into how to manage all of this. In the UK, Crunch provides affordable accounting solutions for freelancers.
Contracting
In our experience in the international development field, there are two aspects to this: 1) the terms of reference (ToRs) or scope of work (SoW), and 2) the contract.
Generally, you will see the ToRs or SoW in the request for proposals. This document will outline the client's needs that they are contracting for. Once you apply and have your application or proposal selected, you will need a legal contract that outlines your and your client's responsibilities and obligations, how you will get paid, and how you will break the contract. Contracts often integrate the ToRs, SoW or even the proposal that you have developed (especially if there are no ToRs).
Most of our clients, especially larger NGOs and international organisations, take care of the contracting side of things, so all you'll need to do in that case it to make sure it's reasonable and ensure that the ToRs are crystal clear to you and your client. You may also need to ensure that the terms of payment are fair. Many clients like to backload milestone payments, so you receive most upon their approval of the final deliverable. However, if it's the type of project with multiple deliverables (my work tends to have an inception report, draft report, then final report), then there's no reason why you shouldn't be paid in multiple payments that roughly reflect how much work you've done to date.
One tip is to NEVER WORK WITHOUT A CONTRACT. Contracts are there to protect both you and the client. It has become normalised in the international development sector for clients to expect consultants to commence work before they provide a contract. This is not okay and so please do not participate in the normalisation of this practice! OK, rant over :D.
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Invoicing
Okay, so strictly speaking this is also part of bookkeeping and accounting but it's important so warrants a few quick notes.
In line with your contract, you will issue invoices by email after submitting your deliverables (or after they're approved, depending on what your contract says). The format may depend on the jurisdiction. In China, for instance, invoices are pre-certified and there are specifications about how to issue them. In the UK and US, you can type out an invoice into a Word document which includes:
How much you're owed
Due date
Date of issue
Bank details
Your business information
ToRs (in annex)
We include due dates of 15 calendar days on our invoices. We make the due date clear to the client when issuing the invoice and say "please settle by XXXX date or kindly inform us when you can settle". When those days have passed, we send a reminder email to ask them to pay. Some clients can be slow to pay and hide behind their bureaucracies ("oh, it's with finance dept and there's nothing I can do"). However, you as a freelancer deserve to get paid and must follow up politely but regularly. We've never had an instance where a client does not pay. But I have had to write to a client who after three months hadn't paid to politely threaten legal action. They then promptly paid!
Note that the accounting software mentioned above often includes invoice issuance. Clients may also require you to complete payment claims and timesheets but it is best that you in any case issue invoices for your own records.
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Set up a bank account
In many jurisdictions, including the UK and US, sole traders can simply use their personal accounts to receive consulting fees. Incorporated companies tend to require business accounts.
We are sole traders but like to keep a separate account for business purposes. This makes it easier to keep track of business vs personal revenues and expenses. We also conduct a lot of business in other currencies, so we use Transferwise (affiliate links, because we're big supporters), which allows you to receive and convert in different currencies much more easily and affordably than conventional banks. Transferwise is free to set up and it also gives you domestic bank account details for the UK, US, Eurozone, Australia and Canada.
And that's it, folks! Feel free to get in touch via the Google & Facebook groups (IC-Hubbers only) to ask any questions. If you're not a member yet, then why the heck not! It's free to join and you'll get instant access to a tonne of free resources and a supportive network to accelerate your freelance social impact consulting careers!
Disclaimer: Please note that this article represents our lessons learned from our combined nine years of consulting. It does not represent legal or accounting advice.