The Five Minute Guide to Becoming a Freelance Software Developer

I started my .NET consulting firm with a $35 check for a business license and a drive to city hall. I didn’t worry about anything but writing code and meeting deadlines. I can’t say it was a bad way to go.

Until you have someone willing to pay money for your services, the tasks below are a waste of time. My advice is to be prepared to get the process started, but don’t rush out and spend hours researching and implementing these steps until you’re sure you have a viable business. And by a viable business I mean you have sales.

This advice is intended for someone looking to become a freelance software developer or web designer (or looking to start a small web design/development/consulting firm). If you intend to seek venture capital then move along…these aren’t the droids you’re looking for.

Disclaimer: I’m neither a lawyer nor an accountant. I have opinions on starting a business only because I’ve been through it once or twice. Please seek the help of a trained professional for help with starting your business. Also, the advice about business structure and DBAs applies only in the U.S.

Business Structure
You need to decide between an S-Corporation, an LLC, and a Sole Proprietorship.

Don’t even think about a C-Corporation. They come with a ton of complexity and double taxation (where earnings are taxed twice because the corporation pays income tax on its profits, and you pay income tax on what you draw from the corporation). It’s not worth the complexity unless you plan to pursue venture capital. If you do, stop reading now and head over to Guy Kawasaki’s blog.

For the sake of the remaining 4 minutes and 42 seconds I’m not going to describe the other three options in detail when you can read about them on Wikipedia: S-Corp, LLC, Sole Proprietorship.

The digest version:

  • A Sole Proprietorship is by far the simplest, but provides the least amount of liability protection.
  • An S-Corp provides slightly more protection but quite a bit of headache at set up and tax time.
  • An LLC provides the most protection and is fewer headaches than an S-Corp, but you can’t grant stock options and VCs won’t fund an LLC.

I run a very small shop and I’m able to track my finances using online banking and Excel. To eliminate the need for additional bookkeeping I’ve remained a Sole Proprietorship for five years, but I am making the move to an LLC in 2008 to reduce my liability.

No matter the direction you choose, hit LegalZoom to file your papers. And be sure to find a good accountant (see below).

DBA (Fictitious Name)
DBA stands for “Doing Business As,” and is also referred to as a Fictitious Name because…well…it’s a name you made up.

If you use your “real” name as your company name (i.e. Rob Walling), or your “real” name plus a description of your line of work (i.e. Walling Consulting), then you do not need to file a Fictitious Name statement.

If you choose to use a fictitious name for your company do an online search to ensure it’s not already taken within your industry. Any common name you choose will likely be used by someone else, but as long as they are not operating in the geographic area you plan to target, or in your industry, you’re in the clear. I would hit Google for this kind of search.

The next step is to make sure the name is not trademarked. LegalZoom can also help with this, or it appears you can do it on the US Patent Office website (although I wasn’t able to figure out how to execute a search).

Next is your fictitious name statement. The idea is to place an ad in a newspaper or other periodical announcing your use of the name, and a few weeks later you’ll receive a certificate indicating you went through due process. It doesn’t mean you’ve trademarked the name; it just means you can go into a bank and open an account in the name of the business.

For this one I would also hit LegalZoom.

Resale License
I obtained a resale license many years ago for a comic book business I started with my brother. These days, as a software consultant, I don’t have one.

If you need a resale license to buy items at a discount (some wholesalers require one to prove you’re not that pesky “general public”) or to avoid paying sales tax up front (since you will charge the tax directly to your customer and remit it to your local governing body), hit LegalZoom or call your local city hall.

You’ll need a few people in your court as you start and grow your business. You would not believe how helpful it is to have a long-term relationship with a good team of advisors. Before I found my CPA, Lawyer, and Insurance Agent I had no idea what I was missing.

Required: CPA.

Under no circumstance are you to do your own taxes. Don’t go anywhere near a copy of TurboTax. Do not skimp on a CPA. Try to get recommendations: talk to your mortgage broker, banker, or friends who own businesses. Don’t settle for someone you feel so-so about. Be picky.

Depending on your locale, taxes for a Sole Proprietorship will run $400-$600. From what I hear taxes for an LLC will run $600-$1,000.

Optional: Lawyer.

I used a lawyer to create a personal estate plan, and since then I’ve used him as a resource. He either answers my questions or refers me to someone who can.

Optional: Insurance Agent.

I have an insurance agent I use for personal insurance needs, who has come in handy on many occasions when discussing my business needs (liability insurance, etc…).

Health Insurance
If you have a working spouse by all means take advantage of their insurance. If not, see if Kaiser is available in your area, or hit eHealthInsurance. Health care is absurdly expensive, so be prepared to pay $500-$1,000 per month for decent family coverage.

Other Insurance
It’s common to wonder if you need Errors and Omissions insurance. This depends on the kind of clients you’ll be working for and the likelihood that you will be sued. Most solo developers I know do not have E&O insurance, as it runs $1500-$2500 per year. It’s up to you to decide how comfortable you are with or without it.

Another option is to get a personal umbrella insurance policy that provides a pre-specified amount of coverage if you are sued. This type of coverage will only help you if you are a sole proprietorship.

This is critical: open a business checking account using your company name. This allows you to write business checks with your business name on them (does anyone actually write checks anymore?), to cash checks made out to your business, and to easily set up a PayPal or merchant account.

Do not skip this step.

Not only is it a good check to ensure you’ve set up your business correctly since a bank will not allow you to open an account without the proper business documentation, but it’s one of the first questions the IRS will ask when you try to write-off business expenses.

Credit Card
Get a business credit card to track expenses. Advanta has screaming low rates, great cash-back percentages, and they’re geared towards small businesses. You can even get additional cards with spending limits, and all purchases are tracked separately for each card.

Get an extra card for your spouse and put a $1 spending limit on it. He/She will think it’s hilarious.

How Much to Charge
Sigh. So much has been written on this subject. The right answer to this question is: what the market will bear. Do your research. Until you’ve differentiated yourself you will be at market rate, which is probably less than you’re worth if you’re taking the time to read this post.

As you invest in self-marketing this rate will rise as people come to you instead of the other way around. The first time this happens you will fall out of your chair. Take it as a sign of demand.

One mistake I see many freelancers making is charging too little. If you always have too much work then raise your rate until you have a more reasonable workload.

I’m not going to guilt you into this one, but if you are considering becoming a freelancer and not putting away at least 10% of your annual income into a retirement account, email me and I will convince you why this is a terrible idea. Bottom line: save for retirement.

Vanguard is leaps and bounds above other investment firms I’ve used – they have low rates, excellent performance and amazing customer service. I honestly don’t know how they do it.

Read up on the SEP IRA and SIMPLE IRA. I’ve used both and they are both great tax shelters.

Source Control
You don’t want to be a server administrator. With the number of patches coming out these days, initial configuration, backups, upgrades, repaves…using an old desktop as a source control server is more trouble than it’s worth. It will run twice the cost of a hosted solution in maintenance hours alone.

And don’t forget what happens when something breaks and you don’t have time to fix it. This will happen.

My recommendation for those seeking simple, cheap source control is to open an account with DreamHost (careful, I get some referral money if you click on that link) and use their free Subversion add-on. I’ve been using it for going on 18 months and it’s brilliant. Fast, reliable, no hassles.

If you have to use a Windows-based solution such as Vault or VSS, get a Virtual Private Server (VPS) from someone like A Windows VPS starts at $40/month and I’ve had nothing but good luck with HostMySite.

Time Tracking
I have two favorites: SlimTimer and ClickTime.

Bug Tracking
I’ve tried several free tools and couldn’t get past the learning curve or the maintenance issues. I have finally settled on Hosted FogBugz and have never once regretted the decision. Talk about great customer service and painless bug tracking, collaborative spec authoring, customer support (for my Micro-ISV), project management, software estimating, etc… It’s not cheap, but the time and aggravation you save will pay your FogBugz bill 10x over.

My five minutes are up! If you have questions or comments you know what to do.

[tags]programming, software, freelance, consulting, going solo[/tags]

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#1 Jon Chase on 01.18.08 at 1:11 pm

WRT insurance (business related, not health related) – are you saying you don’t *need* insurance? I ask b/c I was under the assumption that one needs general liability insurance.

#2 Stephane Grenier on 01.18.08 at 1:52 pm

One other quick tip I’d ad. Get all your credit in line before. If you’ll need a credit card do so before you quick your job and become a freelancer. It will be many times easier and on better terms. Same if you plan on getting a car or buying a house.

As well I generally recommend getting a line of credit set up as an extra safety margin. When you don’t need it you can get it, when you need it you can’t.

Planning ahead financially is a big part of succeeding as a freelancer.

#3 Jon Chase on 01.18.08 at 1:55 pm

Are you sure that an LLC reduces your liability? If your business has no credit history, when you sign up for those bank accounts, like it or not, the bank is going to make you (personally) co-sign on those applications (since you have a personal credit history).

I could be wrong on this, b/c I’m no where near a lawyer right now:).

#4 Chris Monaghan on 01.18.08 at 6:53 pm

If you’re going solo, I’d like to recommend Time59.

It’s a web-based program that lets you track your time and expenses, create and e-mail invoices, and process payments. There’s a free 30 day trial and it won’t break your budget at $19.95 per year for unlimited use.

#5 Rob on 01.18.08 at 9:15 pm

@Jon – That’s right, you are not required by law to have general liability insurance. Some projects will require it, but unless you are working on one it is up to you whether or not to purchase general liability insurance.

@Stephane – I couldn’t agree with you more. This is one piece I left out due to time constraints, but I’ve had a line of credit for the past five years and it has served me well.

@Jon – You are talking about financial liability in terms of obtaining a loan. An LLC will not help with this situation, but it will help protect your personal assets if you get sued, which is another kind of liability altogether (legal liability).

#6 James Shaw on 01.19.08 at 9:05 am

thanks, great pointer to legalzoom! seriously i hadn’t heard of them and i’ve been waiting for my CPA to send me direction on how to get a sales permit.

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#9 Russ on 01.19.08 at 11:34 pm

Really great overview to starting up any business actually.

Probably the best advice that you give here is to not spend any money on this until you have work (or in the case of certain other businesses) a legitimate demand for your products or services. Know your market, instead of going with the “open and hopin'” business plan (i.e., “I think I’ll start a business and hope customers show up”).

#10 JD on 01.20.08 at 12:17 am

I agree 100%. I might add general commercial liability insurance would be a good idea. It’s kind of like the umbrella policy for an individual and about as cheap. If you’re making a lot of money (i.e. would be above the 25% fed tax bracket) an LLC is a must have as you can get paid through “distributions” beyond your normal salary and get taxed at capital gains rates.

#11 Ryan on 01.20.08 at 1:35 am

Okay, you’ve covered your basis Rob, now how about “Next Steps”?

Next, it’s probably time to get more sales. One thing very often overlooked by talented and busy coders and the majority of sole proprietors is marketing and branding. You wrote a great article on how to self-market ( people should read and follow.

But there is also value in having other “specialists” market and sell for you too.

Start with defining your brand (your image, to attract customers). If you don’t have a web site, get one. Don’t do graphics? Find a designer you can trade services with. Someone who can add some style to your web site or apply skillful search engine optimization techniques to drive more targeted business your way.

Perhaps a nice logo or business card is the difference in communicating to a client you are reputable, established and professional. Alternately, without a polished Corporate Identity, you might not get a second look or a call back, not to mention being able to get away with that higher hourly rate.

So, of course I offer these as great next steps because I am a designer and will give Rob a large kickback if you should call upon my services. 🙂

#12 » Daily Bits - January 20, 2008 Alvin Ashcraft’s Daily Geek Bits: Daily links plus random ramblings about development, gadgets and raising rugrats. on 01.20.08 at 10:09 am

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#13 Jason Veenker on 01.21.08 at 1:05 am

Rob – you’ve done it again. Hit it on the head. I am certainly going to refer your blog to several colleagues who might be in the hunt for their own business – software developer or not. Very simplistic, easy to understand. You mind if I use your material to develop an “Entrepenuership 101” class? BTW – in your world of software development, I have a lead for a very good, solid, reliable IP lawyer. Drop me a line…

#14 Priscilla Goodman on 01.21.08 at 12:45 pm

wow…daunting to see how much there is to think about in moving forward into consulting, but wonderful not to have to “reinvent the wheel”. Great to have an easy to understand reference from your years of experience.

BTW, I’m not sure if there are software consulting companies that do this or if it would even be of interest to those really wanting to individuate and be totally on their own, but the management consulting company I work in ASSOCIATION with (technically I am my own business, but I’m an Associate with them also) is a great transition from working FOR an organization to working totally on my own. I get to use their company as a front for services I offer and an already established reputation, in return for working under their name. It allows for almost total autonomy, but with resources, including liability coverage and handling of finances (for the clients I work with in my Associate role). They get a percentage, but the exchange seems well worth it in these beginning stages.

#15 Greg Kiefer on 01.21.08 at 12:52 pm

Nice overview Rob. Wait until you have to start filling out the forms for every client that wants you validate that you have insurance.

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#17 Ben on 02.07.08 at 9:34 pm

This was an excellent post! I have considered doing this for the past year and it was very insightful.

#18 DK on 02.19.08 at 8:04 pm

This was everything I’ve been pondering when considering starting a microISV **EXCEPT** software patents. Its a complete mystery to me. I mean, you sell an invoicing system. How do you know someone won’t sue you based on a patent they’ve filed (and sometimes these patents are so vague)? I’ve been working on an messageboard product in my spare time, and I’m thinking of releasing it as open source because I’m afraid someone somewhere will have some patent I’ve failed to find and will sue me. Any tips/guidance in this area?

#19 Rob on 02.19.08 at 8:13 pm

@DK – The odds of someone suing you for a small application are slim to none. The lawsuits you hear about are typically huge companies suing other huge companies. Small-timers like us are rarely (ever?) involved in lawsuits of that nature.

Besides, you will receive a cease and desist letter long before you wind up in court. You’ll have plenty of time to react before you have to call a lawyer. I wouldn’t worry about patent issues until you’ve made some sales and grown your product into more of a mature business.

But this is a good point – thanks for bringing it up.

#20 Brian on 04.15.08 at 2:17 pm

Rob, why would you get a credit card in your business name, and then give on to a spouse for (one would assume) non-business purposes? Wouldn’t that defeat the purpose?

#21 Rob on 04.15.08 at 5:21 pm

@Brian – Many times spouses will make purchases for the business. But you are correct – if the spouse used it to make personal purchases it would defeat the purpose.

#22 George on 06.11.08 at 10:23 am

Hi Rob,

Fanurio is another tool designed for home offices. It helps with the less appealing aspects of freelancing like invoicing and keeping track of time. It’s a useful application, with a user-friendly interface.

#23 Dianna on 07.13.08 at 4:28 am

Hey Rob,
I don’t think I have enjoyed a post as much as this particular one in a very long time. You have some really great ideas and it seems like you are doing all the right things….(I have had several businesses along the way myself) LLC will take care of you in a more pragmatic fashion and protect you favorably should there be that nasty “D” word come into your marriage. There are other reasons to run under LLC, but that is the one that comes to mind easily. BTW congrats on the new Doc in the House!

Your blog is GREAT! I will be recommending it to some of my colleagues.

#24 antuan on 12.19.08 at 1:11 pm

A good way to build your reputation is to have your few initial clients testify about their good experiences with your work. There are many ways to do it, let them write comments on your website, prepare “success stories” telling the story and accomplishments or have them vote for you in Trust-index to get a plain 5.

#25 Expenses You Don’t Think of When Starting a Business | Software by Rob on 01.07.09 at 10:22 pm

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#26 Anonymous on 01.08.09 at 12:57 pm

About source control, it can be zero-cost. Using a distributed source code management system doesn’t involve any sort of central server and thus maintenance. You can easily setup a repository on off-site hosting via ssh or http, etc., for “backup” purposes.

#27 MicroISVs, Software Products and Startups: Software by Rob’s Most Popular Posts of 2008 | Software by Rob on 02.10.09 at 2:09 pm

[…] The Five Minute Guide to Becoming a Freelance Software Developer “This advice is intended for someone looking to become a freelance software developer or web designer (or looking to start a small web design/development/consulting firm). If you intend to seek venture capital then move along…these aren’t the droids you’re looking for.” […]