From the January 2000 issue of Startups

Sonny Hong began his company like many entrepreneurs do: no money--just some good connections. But when his graphic design firm, Sonnyside Up, began to grow, he didn't seek help from investors; instead, he turned to freelancers.

"Coming out of school, I had no capital, no trust fund, no investors," says Hong, 34, who began his firm in 1995 during graduate school after doing some design work for a friend's start-up. "I couldn't afford much overhead. [With freelancers,] I didn't have to pay salaries. I didn't need any equipment [other than] my own computer." And he didn't have to make space for employees in his apartment-cum-office space.

Hong has since moved his company to the front half of his 2,000-square-foot rented home in Culver City, California, and hired two employees, but he still relies on a team of freelancers to better serve his clients. When projects require expertise Hong doesn't have, he calls on his network. "I can pretty much pick which person [suits] which job, and that gives me great flexibility," says Hong, who expected to triple his 1998 sales of $110,000 last year. "I'm able to provide better service to my clients because I can [tailor] my team to their needs."

Hong also contracts with freelancers just starting out, which saves him money, helps their careers and launches strong business relationships. "Having been a starving student," he says, "I realize there are a lot of talented people out there who haven't had opportunities [yet]. They could become really good designers [with] the right training."

Hong says he does run into some flakiness on the part of his freelancers--like the illustrator who left for vacation in the middle of a project--but tries to minimize it by paying well, allowing creative freedom and developing relationships with them. "Because my work is my life, the people involved with me become part of my family," he says. "So I try to take good care of them, and they tend to take good care of me."

The Fine Print

What exactly is the difference

between an employee and a freelancer (also called an independent contractor)?

"The principal distinction is control over the means to the end--how you get to the completed project," says Jeffrey L. Braff, a partner in the labor and employment law department of Philadelphia law firm Cozen and O'Connor. "[But] you need to look at the totality of the circumstances." In other words, a variety of factors come into play.

Here are some things Braff suggests watching for:

  • Don't provide employee benefits or withhold taxes for independent contractors.
  • Pay independent contractors on a per-project basis, rather than hourly, and have your contractor bill you with an invoice.
  • It's helpful if independent contractors have an entrepreneurial stake in their business-for example, they (rather than you) pay for their expenses. Keep copies of paperwork with their company logo to show the contractor is an independent business.
  • Have a contract documenting their independent contractor status; be careful about termination and exclusivity provisions that may be more suitable to an employee contract.
  • Watch your language: Say "retained" and discontinued" instead of "hired" and "fired." You are the "principal" instead of "employer." Contractors are paid "fees," not "salaries" or "wages."
  • If you run a newspaper ad for a contractor, place it in the "Business Opportunities" section and keep a copy for your records.

For more information, visit www.irs.gov/forms_pubs/pubs and download Publication 15-A, Employer's Supplemental Tax Guide.