First off, if you’re going into business for yourself, stop thinking of it in terms of freelancing. You’re setting up a business and need to treat it as such.
I’m certainly not an attorney or an accountant but speaking from personal experience, you have some options for setting up your business. Let’s assume that you don’t want to do the first option, which is just winging it, cashing the checks, and hoping for the best.
The sole proprietor route is pretty easy, but it has some drawbacks. The big one is that it leaves you personally liable for any bad thing that might come your way in the course of running your business. Just as an example, let’s say you designed Company A’s logo for $1,000. Six months later, Company A gets a cease and desist letter from Company B in California who has a registered trademark almost identical to the logo you designed. During that six months, Company A has invested tens of thousands of dollars in signs, car wraps, uniforms, television commercials — all with the logo you designed for them.
Company A is understandably upset, so they file a lawsuit against you to recoup some of the money they’ve spent as a result of you selling them a logo that somebody else already owned. Let’s also say that you didn’t bother to get business liability insurance. Now you’re in big trouble because you, not your business, are personally responsible for any judgment against you. In other words, you could have most of your assets seized and be staring directly at bankruptcy because of it.
If you’re still interested, here’s information from the State of New York: New York Business Express - Sole Proprietorship
A safer option is a Limited Liability Corporation (LLC). The state regards an LLC as a legal entity that is separate from your personal finances. The LLC can engage in contracts, set up bank accounts, get insurance, and it’s all separate from your personal finances. If you get sued, like in the example I mentioned, it would be the LLC that gets sued, not you personally. The money in your LLC’s bank account might be seized, but your home, your car, your personal bank account, your investments, etc., would be safe.
The IRS allows small one-person LLCs to combine the LLC’s income tax filings with the owner’s, which means your LLC won’t typically need to file separately. Even so, it’s important to keep your personal finances totally separate from the LLC. In other words, you should have a separate business checking account for the LLC and not treat it like your personal account since it’s only for business. For example, if you have $10,000 in the LLC checking account and you want to buy a new business computer, you can pay for it directly from the business account. However, if you want to buy a new television for your home, you need to transfer money from your LLC’s account to your personal account to keep the difference between the two clean and distinct.
Here’s what the State of New York says about LLCs: Forming a Limited Liability Company in New York | Department of State.
Here’s information on what RKK mentioned regarding New York State sales tax. It’s a little fuzzier than here in Utah, where graphic design services are typically not taxable. I wouldn’t be at all surprised if New York City has additional rules (in case you live there).