There are fun parts of solopreneurship, and then there's legal and accounting. It's annoying, but it has to be dealt with. In this lesson, we'll cover some of the things you will have to consider and give you tips on how to best protect yourself and keep everything as simple and cheap as possible.
The following isn't legal or tax advice. If in doubt, consult a lawyer or tax consultant. Each country has different laws and principles - what is a norm in one country may be a problem in another. Rather than providing specific advice, we want to mention basic principles and some points you may want to consider.
Company vs sole proprietorship
All business activities have to be conducted under some legal form. Generally speaking, you can establish a sole proprietorship or start a company. Depending on your country, each can have multiple forms, follow different rules, and have various obligations, advantages, and disadvantages.
Without diving into the differences between sole proprietorship and company (which, again, are different in every country), we want to mention liability briefly. In general, sole proprietors are fully liable for all losses they incur. On the other hand, companies usually have limited liability - only the company's assets are at risk, while the assets of the company owners are protected. This principle is especially important if you cause substantial damage to your client. If you're a sole proprietor, every single asset you own (like a house or car) can be taken from you to compensate for the losses incurred by the damage. From this point of view, operating as a company is much safer. In the end, you have to consider the nature of your business and how much you're exposed to causing substantial damages or incurring significant losses.
In some countries, you can get started without establishing a sole proprietorship or a company, but it's usually connected to the income limits you can't overcome. If you are employed, the income from your job likely puts you above the limit.
We recommend learning how all this works in your country and what your options are. Even if you can start without a sole proprietorship or a company, it's knowing what legal form you'll transition to down the road - and when it's time to do it.
💡 Keep in mind
In legal matters, don't follow advice from people outside your country - it doesn't apply to you. Find a reputable domestic source instead.
Client contracts
You may work in a field where a contract often formalizes the activities. If your client wants you to sign one, always read it carefully. Be wary of any unusual clauses, delayed payment terms, or penalties.
One of the reasons the client may want your signature is a clause saying he's the owner of all intellectual property you produce for him. As we mentioned in Lesson 2, ensure the contract doesn't say that the client owns all IP you create during the contract.
If you operate under your own company, ensure you're entering into a contract as a company, not a person. If you signed a contract before you had a company, the contract is tied to you personally - and you are personally liable for the damages - even after you establish a company. In that case, inform the client that you'd like to update the contract and change the contract party from you to your company.
Employment “benefits”
Being employed usually comes with having your health insurance, saving for retirement (pension plan), or other (sometimes mandatory) payments specific to your country handled or paid for by your employer. When you are on your own, this responsibility (or option) usually falls on you. In some countries, you can operate as a company with no employees. If you choose that route, learn what it means in connection to the aforementioned benefits and responsibilities.
Accounting
The extent of your accounting obligations is defined by the legal form you're operating under - you'll likely need an accountant to keep an eye on it. Find out how complex or frequent these obligations are. There's a chance you won't have to pay the accountant every month, but only send her the invoices at the end of the year. When you find an accountant, ask everything you need to know and whether what we just mentioned is possible.
Issuing invoices can be done in many different ways, but we recommend using Flowlance, which will help you organize your clients and generate & send all invoices in two clicks.
Taxes
Depending on your country, the accountant who did your accounting may also be able to file your tax return. If you are employed, there's a chance your employer's accountant will (have to) be informed about your side income.
What usually makes things complicated and requires involving the accountant or tax advisor are invoices to and from other countries. If you want to keep it simple, you may have to stick to domestic clients and suppliers. If you operate under a company, you can pay for trivial expenses from abroad from your personal bank account and don't involve your company (and consequently your tax advisor).
💡 Keep in mind
Not operating as either a company or sole proprietor doesn't exclude you from reporting your income and filing a tax return.
Remember
👉 Operating under a company may be safer than a sole proprietorship.
👉 If you can, enter into contracts as a company, not a person.
👉 If you keep it simple, you may need the accountant's services only once a year.
👉 To avoid more complicated tax situations, operate only in your country.
👉 Lawyers, accountants, and tax advisors from smaller cities are cheaper.
👉 If you need more clarification on something, always consult a professional.
Homework
1️⃣ Find out whether establishing a sole proprietorship or having a company will be better for you.
2️⃣ Look up some contractor contracts online to learn what the standard is.
3️⃣ Consider how you want to approach insurance and saving for retirement when your employer won't take care of it anymore.
4️⃣ Research accountants who work with solopreneurs and compare their prices.
Insights from solopreneurs
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