How to Set Up a Self-Employed Business

The past few years have been a major shift in the workforce that has been dubbed “The Great Resignation”, where a record number of people left their jobs to pursue independent work. In fact, the U.S. Bureau of Labor Statistics reported that an incredible 47 million people voluntarily quit their jobs in 2021 alone, and the trend will only continue to rise. Nearly half of the workforce expected to be self-employed by 2027. 

With so many people pursuing independent work, it's more important than ever to understand how to set up and run your own business. Proper planning and administration may not be the most glamorous tasks, but they pave the way for success on your own terms. 

Setting up your business when you’re self-employed doesn’t have to be terribly complicated or expensive. But there are a number of details that you need to take care of. If you promptly attend to them, you’ll be off to a good start and be primed for self-employment success.

10 Steps to Set Up a Self-Employed Business

1. Decide on your business niche and choose a name

First and foremost, you need to decide what you will do or sell. Think about your skill set and what you enjoy doing, and pick something you care about. Your business thrives when you solve specific problems for specific people. If you have a W-2 job, think about the things you do that are the most rewarding, and research gaps in your industry where your skills can make money. 

Your business name matters. It should tell people what you do in a way that's easy to remember. Test potential names with friends and check if the domain name is available (this will come in handy later in our checklist.) Consider how your name will sound when you say it out loud – is it hard to spell? How will it look on business cards, websites, or social media profiles? These things aren’t dealbreakers, but they’re good things to consider before diving in further.

Before you commit to a name, check if someone else already owns it. Search the USPTO database for similar names in your industry. A trademarked name means you can't use it unless you want legal troubles.

2. Choose the best form of ownership for your small business

Next, consider how you want to own and operate your self-employed business legally. Choosing how to structure your self-employed business legally tops the list of setup steps because there are liability risks and tax obligations to what you choose. Your business structure affects your funding, tax responsibilities, and paperwork requirements. It also impacts your liability for any business losses. It can get overwhelming, but narrowing things down helps.

Sole proprietorship and limited liability companies (LLC) are two of entrepreneurs' most common forms of ownership. If you're not sure which is which, you're not alone. Many entrepreneurs don't fully understand the differences. 

If you simply start working and don’t take steps to form a separate legal entity for your business, you’ll automatically be a sole proprietor. This is what most people do. Default to sole proprietorship and you retain simplicity, but expose yourself to substantial personal liability. However, there can be advantages to forming a separate entity to own and run your business. The most popular are limited liability companies (LLCs) and corporations. Forming one of these can limit your personal liability for business debts and lawsuits. In some cases, they can also save you on taxes. Opt for an LLC or corporation, and you limit liability on paper, but pay more upfront and get bombarded with paperwork.

3. Obtain an EIN, if needed

EIN is short for employer identification number. You use this number to identify your business to the IRS and other government agencies. You ordinarily don’t need an EIN if you're a sole proprietor. You can use your Social Security number to identify your business. However, you can obtain an EIN. If you form a corporation or multi-owner LLC, it must obtain an EIN. If you create a one-owner LLC, you don’t need an EIN unless you have employees.

4. Register and license your small business

Depending on where your business is located, you may need to obtain a local business license. Most cities and counties charge a fee for this basic permit. This usually involves filling out a form and paying a fee to your city, county clerk, or another official. 

Some industries need special state-issued licenses—for example, real estate brokers, cosmetologists, or restaurant owners typically need to be state licensed. Research your industry's requirements

You should also consider whether you want to use a name other than your personal name (or the official name of your LLC or corporation) to identify your business. You can use a trade name, also called an assumed name, “DBA” (short for doing business as), or a fictitious business name. This can be any name you want that is not already in use. To do this, you need to register your assumed name. In some states, you register with your county government. Other states have state-wide trade-name registration.

5. Set up your business bank account

It may seem easier to just use your personal bank account and credit card for your business financial transactions. But commingling personal and business finances tends to create major headaches come tax time. Instead, set up dedicated business banking and credit accounts.

Although it’s not technically legally required, setting up a separate bank account for your business is always a good idea, because it creates a home for all your business income and expenses. This makes tracking your income and deductions far less tedious. A dedicated business card will also help simplify your bookkeeping, especially when tax season rolls around.

6. Obtain small business insurance

Small business insurance is a type of coverage designed to cover potential risks and challenges your business might face. Just like you have car insurance to protect your vehicle from accidents, small business insurance safeguards your business from unexpected events. Consider these common types:

• General liability insurance covers accidents, injuries, and property damage

• Professional liability (E&O) protects against claims of mistakes or negligence

• Business property insurance covers your equipment and workspace

• Business interruption insurance replaces lost income if you can't work

The decision to get small business insurance depends on a few factors, such as risk tolerance, type of work, client and legal requirements, and your budget. Some self-employed people need special liability insurance—for example, various types of professionals are required to have professional liability coverage. You may also need insurance to cover your business property and insurance.

Some fields require specific coverage. Consultants, healthcare providers, and contractors often need professional liability insurance by law or client contract.

Work from home? Your homeowner's policy likely doesn't cover business activities. Look into in-home business policies that protect your equipment and business liability for $300-$600 annually.

Match your coverage to your actual risks. If you have no employees, expensive equipment, or client visits to your workspace, you may need minimal coverage. Get in the habit of re-evaluating your coverage as your business grows. It’s not just about legal requirements—it prevents a single incident from destroying the business you've worked hard to build.

7. Set up a recordkeeping system

Keeping up with receipts and purchases is never the most glamorous part of entrepreneurship, but it’s absolutely vital for all businesses. No matter how small your business is, you need records of what you earn and what you spend. It’s particularly important to track your business expenses with receipts and other records. These are virtually all deductible—but you have to know what they are to deduct them.

Bookkeeping also helps you make informed decisions and give you insight into the health of your small business, which is particularly important in the early stages. You’ll want to track every transaction and reconcile it regularly. Sounds overwhelming? It doesn’t have to be if you choose the right business bank account. 

Found makes it easy to keep your finances organized with integrated bookkeeping tools. With every swipe of your card, Found tracks business expenses so you don’t have to. Automatic categorization helps you find write-offs and save on taxes. Learn more → 

8. Create a digital presence and begin marketing your business

Your business should have an online presence even if you don't sell products or services online. Here are a few places to start:

• Create a simple website with your services, contact information, and client testimonials. 

• Set up social media accounts to help you connect with potential clients. Pick 1-2 platforms where your target audience spends time rather than trying to maintain a presence everywhere. For example, LinkedIn works well for B2B services, while Instagram or TikTok might suit creative businesses better.

• Set up a Google Business Profile to appear in local searches. Ask satisfied clients for reviews to boost your visibility and credibility. 

Create content that solves problems for your audience, and use your expertise to answer common questions in your industry through blog posts, videos, or social media updates.

Your marketing doesn't need a huge budget. You can start small and track which marketing efforts bring in actual clients. Over time, you'll be able to focus your time on what works and adjust your approach based on actual results rather than vanity metrics like follower counts.

9. Pay quarterly estimated taxes

The IRS uses a “pay as you go” tax system where everyone is required to pay taxes throughout the year as they earn income—not just all at once when they file their tax returns. Many traditional W-2 workers don’t have to worry about making these tax payments on their own because their employers withhold taxes from their paychecks, and then send those tax payments to the IRS on their behalf.

When you’re self-employed, your clients and customers do not withhold any taxes from your pay, which means the responsibility falls solely on you. But you’re not supposed to wait until Tax Day to pay all the taxes you owe for the prior year. (In fact, if you do that, you’ll likely be paying a hefty fine.) Instead, you must make estimated tax payments each quarter based on your projected income for the year.

If your income fluctuates, your estimated quarterly tax payments may end up above or below what you actually owe. You'll either get a refund at tax time if you overpaid or you’ll have to pay escalating monthly late fees up to 25% of taxes owed if you underpaid.

Found can help you automatically save for taxes as you go. Found’s auto-save feature sets aside money for taxes each time you get paid. As an added bonus, if you file a Schedule C and are a Found Plus subscriber, you can even make quarterly federal tax payments right from the app.

10. Leverage Tax Deductions

Remember when we talked about receipts earlier? It’s for good reason. Almost everything you spend on your business could be considered a tax-deductible expense. And business tax deductions can be worth a lot: They not only reduce your income taxes, but your Social Security and Medicare taxes as well. Every dollar in business expenses you deduct could save you money. The more you earn, the higher your tax bracket and the more deductions are worth.

Common write-offs include:

• Mileage for business trips and transportation

• Home office expenses, including rent, utilities, computers, and phones

• Coworking memberships or temporary office rentals

• Vehicle expenses, such as fuel, auto loan interest, and repairs and maintenance

• Travel, meals, lodging, and transportation for work trips and conferences

• Website hosting, online ads, or  printed marketing materials

• Insurance you purchase for your business

• Professional services, such as working with an accountant or an attorney

Tip: You can also take the pass-through deduction that allows you to deduct up to 20% of your net business income from your income taxes. We recommend speaking with a CPA or tax professional if that’s something you’re considering.

Freelance better with Found

Embarking on the self-employment journey is both thrilling and challenging, and it can feel lonely, too. That’s where Found comes in. Found was built to make self-employment easier. With smart business banking and powerful, easy-to-use tools, Found makes banking, bookkeeping, taxes, and invoicing—all your paperwork—simpler than ever. 

Setting up and managing a self-employed business can be overwhelming, but with Found's innovative business toolkit, the process becomes a breeze. From obtaining your EIN to securing business insurance and establishing an LLC, Found covers all the essentials to kickstart your entrepreneurial journey successfully. But what really sets Found apart is its commitment to making your life as a self-employed professional hassle-free beyond set-up. With a business bank account that integrates seamlessly with cutting-edge accounting and tax tools, Found becomes more than just a bank account—it transforms into your one-stop shop for tax time.

Love what you do, and let Found handle the rest. Banking, bookkeeping, taxes, and invoicing are no longer daunting tasks but rather simplified, efficient processes that allow you to channel your energy where it matters most: your future.

Sign up today to experience the freedom and confidence that comes with having a reliable partner on your self-employment journey. Freelance better with Found – where simplicity meets success!

FAQs

How much money do I need to start a business?

It depends. Your startup budget depends on your industry. Freelance writing or consulting might only require a laptop and internet connection. A construction or e-commerce business will need more upfront capital for equipment, inventory, or vehicles. Most service-based businesses can launch with $1,000-$3,000, covering basics like a website and technology tools. Home-based businesses slash overhead costs dramatically compared to renting commercial space.

Whatever your industry, remember to budget for unexpected expenses and living costs while starting. A lot of small business owners start while working a traditional W-2 job and scale their business as demand grows.

Do I need to register my business?

Generally, most self-employed businesses need some form of registration, though requirements vary based on location and business structure. At minimum, sole proprietors should register their business name through a DBA ("doing business as") filing if operating under anything other than their legal name.

For tax purposes, you'll need an EIN (Employer Identification Number) from the IRS unless you're a sole proprietor with no employees. This number acts as your business tax ID.

Your local requirements may include:

• Business license from your city or county

• Professional licenses for regulated industries

• Sales tax permits if selling products

• Zoning permits for home-based businesses

LLC registration provides personal liability protection and enhances credibility but requires additional paperwork and fees. If you aren’t sure which option is best for you, consult a business attorney or CPA to make sure you’re covered.

How do I pay taxes as self-employed?

Self-employed individuals pay taxes differently than employees. Instead of taxes being withheld from paychecks, you'll make quarterly estimated tax payments to the IRS and likely your state tax authority. Your tax obligations include:

• Self-employment tax (15.3%) covering Social Security and Medicare

• Federal income tax at regular rates

• State and local income taxes where applicable

• Possible sales tax for product-based businesses

Track all business income and expenses meticulously. You'll report business profits and losses on Schedule C with your personal tax return. Keep receipts and documentation for all business deductions, including home office, business travel, health insurance, and retirement contributions.

A good rule of thumb is to set aside 25-30% of your income for taxes, which helps avoid surprises when those tax deadlines get closer.

Can I be self-employed with a full-time job?

Yes, you can absolutely maintain self-employment alongside a full-time job, often called a "side hustle" or "moonlighting." This arrangement provides income security while you build your business.

If you’re working a traditional job, you’ll want to check your employment contract for:

• Non-compete clauses limiting side businesses

• Intellectual property agreements affecting ownership of your work

• Policies requiring disclosure of outside employment

Time management becomes crucial when balancing both commitments. Many successful entrepreneurs start with 10-20 hours weekly on their self-employment venture, working evenings and weekends until their business can replace their salary.

Tax implications include reporting all self-employment income, even while employed full-time. Your self-employment earnings remain separate from your W-2 income but are reported on the same personal tax return.

This approach allows you to test your business idea with reduced financial risk while maintaining benefits like health insurance from your employer. Many of today's prominent businesses began as side hustles while their founders worked traditional jobs.

The information on this website is not intended to provide, and should not be relied on, for tax or legal advice. Found's core features are free. Found also offers an optional paid product, Found Plus for $19.99/month or $149.99/year. Found partners with various providers to enable you to compare offers from participating institutions, such as lending, filing service, and insurance providers. Found is not a lender, a filing service, nor an insurance provider.