You’re an experienced designer or developer with aspirations to become a freelancer. Shrugging off the corporate cloak —”It’s cosy! It fits well! You’ve had it for years!” — is becoming more and more common.

Most creative people are unable to make a living from the sale of their work alone and therefore becoming self-employed as a freelancer enables you to manage your finances more effectively by earning additional money from short- or medium-term opportunities.

Graphic design, illustration, photography, journalism, writing, web design and development, training and copywriting are some of the sectors that use freelancers on a regular basis. Infact, many freelancers I know don’t simply work in one area. For example, my working month is a mixture of web development, writing and training and this is not uncommon among my peers as well.

There are numerous other considerations. Freelancers can, when the market is buoyant, choose their contract location and duration. They can also decide the length of their holidays (although this isn’t always the case). This greater freedom brings a major responsibility; you have to find work. This can be easy when many projects are underway, but can be difficult at other times. Furthermore, you will have to manage your own finances, which may perhaps involve dealing with an accountant, filling in payroll, tax and VAT forms etcetera.

In this four-part series, I share some thoughts on what you may want to consider when setting up and ‘going it alone’. The detail is UK-centric, but much of what I say is transferable to other regions.

The first in the series is setting up a business.

Register a Company

To be a serious freelancer, you can’t simply do work ‘cash-in-hand’. Instead you will need to set up a company through which you will work. This is not a complicated task and there are a number of companies out there who will do all the hard work for you, albeit for a small fee.

You can check Companies House for the availability of your company name and submit the company formation directly through them if you wish.

Get an Accountant

If you’re like me and can’t be bothered (or indeed don’t have the time) to sit down every month to compile accounts, process payroll and submit VAT returns, it is a good idea to get yourself a trustworthy accountant who specialises in freelancing matters. Ask friends for recommendations, since it can be daunting task finding someone who will work for you.

The Inland Revenue in the UK and the Internal Revenue Service in the US will always want their money and on time, so it is important that you manage submissions correctly.

Join the PCG

The Professional Contractors Group (PCG) is an organisation set up to support contractors and freelancers. For a small fee per year, you can gain access to a huge knowledge base of articles on your chosen topic and they also provide support if the Inland Revenue come calling.

Get Insurance

Many companies oblige their freelancers to get Professional Indemnity (PI) insurance, which may, in some instances, also include equipment, Public Liability and Employer’s Liability insurance.

You can get away without having this insurance, especially if the company you work for has a dedicated QA team, which will soon catch any shoddy work before it is released live. However, it is always best to cover your back.

If you’re a member of the PCG, they can offer advice and discounts on PI insurance. This is quite good since the insurance can be relatively pricey!

What’s Next

The next post in the series will focus on publicising you and your company. This involves creating a brand, blogging and using 3rd-party services.

Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. On the most abstract level, it refers to a market process in which bad results occur due to information asymmetries between buyers and sellers: the “bad” products or customers are more likely to be selected.

Take the Volvo car as an example. Volvo’s cars are perceived to be ’safe’ by many people. However, Volvo drivers are more likely to crash because:

1. Bad drivers choose a Volvo because of the perceived safety qualities of the car, which supposedly offset their inability to drive.
2. Good drivers push their driving skills to higher limits, testing their abilities, therefore taking greater risks whilst driving a Volvo.

The concept of adverse selection has been generalised by economists into markets other than insurance, where similar asymmetries of information may exist. For example, George Akerlof developed the model of the “market for lemons.” People buying used cars do not know whether they are “lemons” (bad cars) or “cherries” (good ones), so they will be willing to pay a price that lies in between the price for lemons and cherries, a willingness based on the probability that a given car is a lemon or cherry.

For instance, if the probability of getting either a lemon or a cherry is 0.5, and the price for a lemon and a cherry is £5,000 and £10,000 respectively, the price they are willing to pay for a used car would be (0.5×5,000) + (0.5×10,000) = £7,500.

If buyers had perfect information they would know the value of a car for certain, and they would simply pay an amount equal to the value of the car.