Whether you’re going into business for yourself full-time or looking to develop a profitable side hustle, freelancing can be a great way to increase your personal cash flow.. There are also a number of other benefits to freelancing, like the ability to set your own work hours, schedule, and wages.
In many industries, freelancing is standard practice. You’ll find plenty of folks working as freelancers in creative industries like writing and editing, graphic design, videography or photography, and consulting. However, that’s not to say that these are the only career options for aspiring independent workers.
Before you dive into a career as a freelancer, no matter what industry you’re in, it’s crucial to have all of your legal paperwork in order so that both you, and your work, are protected.
What do you need to start freelancing legally?
When you’re preparing to work as a freelancer, you need to make sure you comply with the laws and regulations that govern small businesses in your location. For example, some freelancers are required by law to register their business before they can begin to operate.
While you may not operate exactly like a traditional business, as a freelancer you still need to ensure that all your required legal documentation is in order. In this article, we go over all the documents you may need, so you can start your freelancing business off on the right foot.
Legal documents all freelancers should know about
There’s more paperwork involved in setting yourself up as a freelancer than you might initially think. Here are six legal documents that all prospective freelancers should familiarize themselves with.
1. Business registration
The first thing you need to do as a freelancer is register your business––which is exactly what Ownr is here to help with. However, before you can register your business, there are certain decisions you have to make, including:
- The name of your business.
- The physical location of your head office, as well as the addresses of any secondary operating locations.
- The type of business structure you plan to operate (for example, a sole proprietorship or a corporation).
Here are a few things to keep in mind when you’re deciding whether you want to operate as a sole proprietorship or a corporation:
Sole Proprietorship
A sole proprietorship is an unincorporated business with a single owner. The business owner is responsible for paying personal income taxes on any income generated by the business. This also means that all financial obligations including accounts payable, accounts receivable, outstanding debts, shares, or additional liabilities are solely the responsibility of the business owner.
Corporation
A corporation, on the other hand, is a distinct legal entity with its own legal and financial responsibilities. As the owner of a corporation, you will have limited liability, with your personal finances completely separate from those of the business. You’ll also gain advantages not available to a sole proprietorship, like the ability to transfer ownership of the business, raise capital from investors by selling company shares, and take advantage of lower corporate tax rates.
On the other hand, operating a corporation is more complicated than running a sole proprietorship. You’ll need to file both personal and business tax returns every year, as well as dealing with additional business paperwork like your corporation’s minute book and annual compliance filings.
2. Business licence
Depending on your industry and where you operate, you may need to obtain a business licence. Licensing requirements for businesses can vary greatly from province to province, so make sure to do your research when it comes to which licences and permits you need.
Some industries are unregulated, meaning that you can start your business right away without any licensing requirements. However, certain industries like food services, health, and cosmetics may require specific licences in order to operate legally.
Always double-check the requirements for the city or province you plan to work in and ensure that you obtain the right business licence.
3. Company bylaws or operating agreement
The type of business structure you choose whether you require any additional documentation regarding company bylaws or operating agreements. As a freelancer, this might look something like a general outline of the services your business provides and your company policies. For example, if you offer freelance services as a copywriter, you may draft a document that states you maintain ownership of all content produced, regardless of where it is used. There are plenty of free business templates available online that can help you draft a company bylaw or operating agreement.
4. Ownership/partnership agreement
If you register your business as a partnership, you will likely require a partnership agreement, which is a legal document created by a lawyer. It outlines things like how business decisions are made, the duties of each partner, how profits are split, and how other parts of your business function. While most business partnerships start off on the right foot, if things go sour down the line, a partnership agreement both parties.
A partnership agreement should include the following critical information:
- The percentage of ownership by each party.
- The roles and responsibilities of each person working for the company.
- Division of profits and losses.
A partnership agreement should also provide a guide on how to handle internal disputes between partners, and how to proceed if one partner decides to surrender their ownership and rights to the company.
5. Vendor agreement
A vendor agreement is a type of business contract that legally binds you to an agreement to exchange goods and services for compensation. A thorough vendor contract ensures that both you and your vendor understand and agree to the terms and conditions of the proposed business arrangement.
A vendor agreement can also offer protection to you as a freelancer in case of unforeseen circumstances that affect your ability to fulfill orders. A small business attorney can effectively assess your unique situation and draft a document that meets your needs as a freelancer.
6. Non-disclosure agreement
A non-disclosure agreement, often referred to as an NDA, is a legal document or contract in which both parties agree not to disclose any details or confidential information related to the proposed business arrangement. As a small business owner and freelancer, you may ask your clients to sign a non-disclosure agreement in order to protect the sensitive details of your business, goods, or services.
For example, if you run a successful online vegan bakery, you could require clients to sign an NDA that prohibits them from sharing any knowledge of your ecommerce operations, client databases, or confidential details of net profit-and-loss statements. NDAs are easily customizable to suit the needs of your business.
What tax forms do freelancers need?
Working as a freelancer can open up a world of opportunities. Not only do you get to choose which clients you’d like to work with, but you can also decide whether you want to freelance full-time or simply supplement your existing income with some freelance work on the side.
While the amount of work you choose to take on may affect your decision to operate as a sole proprietorship or an incorporation, there are also tax implications for each business structure. As a freelancer you will need to file self-employment taxes, and there are several tax forms you need to fill out depending on which business structure you choose. These could include the T4A, the T2125, Statement of Business or Professional Activities, the T5013, Partnership Information Return, the T1 Return, and the GST34.
Working for yourself also means you may need a business number in order to claim Goods and Services tax (HST/GST). If you make less than $30,000 as a freelancer before taxes, you are exempt from collecting and reporting HST/GST.
According to the Government of Canada, you must register your business for an HST/GST account if it meets the following criteria:
- You make taxable sales, leases, or other supplies in Canada (unless your only taxable supplies are of real property sold other than in the course of a business).
- You are not a small supplier.
Working for yourself
Freelancing requires quite a bit more time management, accountability, and flexibility than a traditional office job. As a freelancer and independent contractor, all of the responsibility falls on you, but you also get more control. As long as your legal paperwork is in order, there are plenty of opportunities for you to find success as a freelancer.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.