Currently in a new freelancing partnership, advice to develop business

Question

An old friend of mine from school and I have started doing web design and development work under a single name. Work is ad-hoc - we're both full time students - and is mostly 'friend of a friend' stuff.

Generally client work is found and done by just one of us, however we split larger projects between us (I'm better at backend/programming work, he's better at frontend/design work). Our portfolio is combined (this is a big plus!).

For work that we do independent of each other the person doing the work takes the payment for the job, when we work together we work out our own split - usually 50/50.

We offer hosting and maintenance, which most clients take, for a monthly fee. This fee is kept as 'company money' for paying the bills and for other purchases. I'm currently using a personal 'e-savings' account for this which had no other use. I pay all the bills myself so this works. We're looking at opening a business bank account soon.

Side note: I trust the guy I'm working with, I highly doubt they'll be any issues working with him with regard to money.

My question is:

• Is this a good way to do things? How would we improve the way we work?
• We're not earning enough to be paying tax. But are there any problems with the way we're operating? (UK) We're not in any way 'registered' or official.
• If we did this full-time how should we change the way we work? I'd envisage pooling contact income and paying ourselves a salary, work varies though so this amount would also vary.

Answer 1

I like the way you and your friend think and operate, starting so young and using both your talents! I hope for your sake, it lasts for many, many years. But you need to start setting some rules.

First off, each of you should list off your abilities, and label them on a scale from 1 to 5 about how you feel with each skill. This should help you determine where you want to focus on. For example, I love doing the back-end stuff, hate doing design or front end design.

Have a general business account set up (as noted above, you'll need business paperwork in order to do so). All income will go into this account. Every last cent. I don't know about the UK, but in Canada and the USA, business income is taxed much lower; most successful people I know use their business for all their income, and only pay themselves minimum wage (or even less!) to avoid a majority of taxes. Talk to an accountant about this.

You'll need to bill yourself to your company, so there is paperwork of where the money is going. If there is a tax advantage for paying yourself as little as possible, and using the company account for purchasing/leasing (!) items you need, then do that. My business would pay for my rent (working out of my home), my car, and my cell phone. I basically took my $8/hr salary for going out and having fun. The rest stayed in the company.

Also when working with a partner or friend, you will need a lawyer. End of story. The lawyer can represent you both when starting up the business, and will ask you many, many more questions that we can to help work out the kinks before they occur. They will help you work out what happens if one of you wants to split, or how decisions are made when you both have 50% of the vote. Do not skip this much-needed step.

As the back-end guy, I will manage the customer's servers, and that is what most of the retainer fee goes towards (unofficially). But again, because I'm paying myself so little and letting the company pay for my toys tools, the company can afford to pay for other things that the company itself needs, not just myself or my partner.

Answer 2

So you passed the first test - finding clients and managing to finish the project. That is the most important aspect.

But now you will face a new area - business management. That is a horror for programmers since it's out of our expertise. I am sure all guys freelancing for longer time will be able to tell you how to manage their business, but myself and my colleagues do it this way:

• we set our salaries (spending without limits will leave you out of money)
• we set premium for all overtime work paid by number of work hours we had to work overtime
• the rest of the money is piled up for our rainy-day salaries
• from that money we pay office costs, buy software and equipment for the office

So to achieve this, you have to seek long-term clients. You will sign retainer agreements with them (Google this term for more info) and of course you must offer them more services which will generate you monthly income. The most important aspect is to have clients who will bring you money each month and to build the client structure.

Answer 3

You need to formalize your partnership and set up some written ground-rules:

• What's the company name?
• What are the roles each partner will take solely?
• Who is responsible for handling money?
• How is money divided?
• How are expenses handled when there's not enough money to go around?
• How are you going to deal with taxation and payroll?
• Will you run as a general partnership, corporation, or some other business form?
• How will you deal with liability in case something goes wrong? (important)

Dealing with the above will cut out friction later on.