Becoming an Independent Contractor: Part 2 – Contractor as Business Owner

In my post earlier this week - Becoming an Independent Contractor: Part 1 - Taking the First Steps - I talked about some of the basic differences between being an employee and being an independent contractor. In that post, I talked mostly on what you’ll need to do on your own that your employer used to do for you.

In this post, I’d like to bring up a point that may not be obvious: As an independent contractor, you’re now becoming a small-business owner. If you do not have employees, there is not a lot of difference between the two. Nevertheless, if you have determined that you are ready to channel your inner entrepreneur and become an independent contractor, you will also need to understand your regulatory obligations as a new business owner.

Below are five steps that you will need to follow to stay on top of regulatory compliance as you embark on your new career as an independent contractor and small-business owner.

Step 1: Register your Business Name ("Doing Business As") - If you choose to name your business along the lines of something like "JLM Consulting", you cannot operate that business under that name until it is officially registered with your local government. Until then the legal name of your business is essentially your given name. Find out how to register your business name here.

Step 2: Determine the Legal Structure of Your Business - Are you going to form a sole proprietorship, partnership, LLC, corporation, non-profit or cooperative? It’s something to consider as your form of business determines the amount of regulatory paperwork you have to file, your personal liability regarding investments into your business, and the taxes you have to pay. Find out more about determining the right business structure for you here.

Step 3: Get a Tax Identification Number - If you are just starting a business you may need to obtain employer tax identification numbers from the IRS and your state revenue agency that identifies you as a business. Find out if this applies to you here.

Step 4: Register for State and Local Taxes - Register with your state to obtain a tax identification number, workers' compensation, unemployment and disability insurance. You can learn more about the  state tax obligations that affect you here.

Step 5: Obtain Business Licenses and Permits - This is an area so often overlooked by independent contractors who often think the nature of their business doesn’t require a license or permit. In fact, every business needs one or more federal, state or local licenses or permits to operate.

Licenses can range from a basic operating license to very specific permits. The government has created a very handy tool - Permit Me - that lets business owners easily identify the licenses and permits required for their business.

Other Resources

Here are some additional resources to help independent contractors establish and master their trade in a difficult economy.

Home Based Business Guide(Business.gov) - This guide provides resources that will help you learn more about working out of your house, starting a home-based business, and managing your business within the law.

With Corporate Layoffs, Tips to Joining the Home Office Set (ChiefHomeOfficer.com) - Tips for the dedicated willing to make a go of independent contracting.

How to Start and Succeed in a Freelancing Career (PowerHomeBiz.com) - Tips for succeeding as a freelancer by starting your freelancing career on the right foot.

Find the Right Home-Based Business to Start (Sparkplugging.com) - A few guidelines to follow when thinking about starting your own home-based business.

How to Freelance Your Expertise (Entrepeneur.com) - Basic pre-planning tips and strategies for anyone looking to freelance their hard-earned skills.