Five Legal Issues Every Freelancer Should Know

Running your own freelance business can be exciting and profitable, but it’s important not to ignore the legal aspects! In this guide, I’ll cover five key legal issues that every freelancer should understand to keep their business on track.

1. Obligations to Your Current or Former Employer

If you’re planning to go full-time as a freelancer, make sure there aren’t any agreements with your current or former employer that could limit your ability to work independently. You might be subject to non-compete agreements, non-solicitation clauses, or non-disclosure agreements that could restrict your freelance work.

If you’re freelancing part-time while still employed, check that your employer doesn’t have restrictions on side work. If your freelance work is similar to what you do at your job, your employer might have a say in what you’re doing—and, legally, they could have the right to.

2. Should You Form an LLC?

While you can operate as a sole proprietor, forming a single-member LLC is often a smart move. An LLC formation can help limit your personal liability and might even save you money on taxes if you elect S-Corp tax status.

LLCs also provide a more professional business structure. You can add owners, get an EIN, open a business bank account, and manage your expenses more effectively. Plus, having an LLC can make your business look more credible to potential clients.

3. Paying Taxes as a Freelancer

As a freelancer, you’re responsible for your own taxes, including federal, state, and local income taxes, as well as Social Security and Medicare.

A good rule of thumb is to set aside about 20-30% of your net income for taxes. You should also pay estimated taxes quarterly to avoid any surprises at year-end. Consulting with an accountant is the best way to make sure you’re set up properly to manage your business finances and taxes.

4. Always Use Client Contracts

Written contracts for freelancers are essential for protecting your business. A good client agreement should include key details like:

• Payment terms
• Scope of services
• Ownership of intellectual property
• Confidentiality
• Termination rights
• Miscellaneous legal terms

Contracts help set expectations and protect both you and your clients if something goes wrong.

5. Contracts with Subcontractors

If you hire subcontractors, it’s just as important to use written agreements with them. Contractor agreements will be similar to client agreements but need to be drafted from your perspective as the hiring party.

Pay special attention to intellectual property terms. Make sure your contractor agreement states that you own the work product and all related IP. Without this, the contractor may legally own their work, making it impossible for you to transfer ownership (or license the works) to your clients.

Final Thoughts

Understanding these legal issues will help you protect your freelance business and set yourself up for success. Whether it’s forming an LLC, managing taxes, or using proper contracts, taking care of these essentials will help you stay compliant and avoid costly mistakes.

(This article is general in nature and is not legal advice.)