After talking with a couple of colleagues who are contemplating making the switch from working with a company as an employee, to trekking out down the self-employment path, I thought that I might be able to share some advice on the transition. Making the switch can be a daunting process. There are legal issues - what type of business do I form? A limited liability? A partnership? An S-corp? There are accounting issues - how do I file my taxes? Do I need to make quarterly tax payments? What will my tax burden look like? How much more do I need to earn per month being self-employed to enjoy the same life style as I enjoy as an employee? Most importantly, there are psychological and personality issues - are you self-motivated? What is your perception of money: as something that is meant to be saved; something that is meant to be invested; or something that there never seems to be enough of? All of these issues take center stage when beginning the journey of self-employment, and all should be weighed carefully before making the switch.
This blog entry - and the ones that will follow - are aimed at those who are contemplating going independent, and are seeking advice or anecdotes from those who have already made this transition. Today's blog entry looks at the pros and cons of employment vs. self-employment. It focuses more on the psychological and personality issues rather than the legal or accounting issues. Future entries will examine drudging through the legal goo necessarily, and tax implications associated with self-employment.
Let me preface this series of blog entries with the following disclaimer: I am not a lawyer, nor an accountant. In case you glazed over that last sentence, let me repeat it: I am not a lawyer, nor an accountant. My comments on legal and accounting issues should not be taken as gospel, but as a somewhat informed opinion. I have been self-employed since completing my undergraduate degree back in 2000, and have gone through the legal and accounting issues associated with becoming self-employed. So my opinions on these matters are educated ones forged from experience, but they are not backed up by years of study, certifications, or practice. I do, however, think I'll be able to accurately address many of the psychological and personality issues, which, naturally, will be most valuable to those with a similar disposition as myself.
Everyone's experiences differ, so I hope to stimulate discussion among others who are self-employed. With any luck, others will feel compelled to share their stories, mistakes, and successes in going independent...
The Benefits of Being Employed
Before deciding whether or not to go independent, it's vital that you understand what you'll be leaving. Being employed has many benefits that are nowhere to be found when working for yourself. Typical benefits of employment include things such as:
- Consistency - a steady paycheck, regular working hours
- Flexibility - paid vacation / sick time
- Employer-Paid Fiscal Benefits - Health/dental insurance, regular raises / bonuses, a retirement plan with (perhaps) employer matching
When you are self-employed, you are your employer. This means setting up a retirement plan is your responsibility. Contributing to it is your responsibility. When you take time off - for vacation, personal matters, or illness - you're NOT getting paid. That steady paycheck is as steady as your availability, marketing, and work ethic. Regular working hours? Ha! You work when your client wants you to.
Due to this, self-employment is not for everyone. It is not for those who need a steady source of income, such as someone living paycheck to paycheck with a family to support. Self-employement is not for those who have trouble motivating themselves to work. Some people need the consistency of a 9 to 5 job; some folks need a manager giving them action items and tasks to complete. There's nothing wrong with this type of person, but chances are someone with this personality will have a hard time making it on their own. Working for yourself requires discipline and much more hard work than working for someone else.
The Benefits of Self-Employment
While being employed has a number of benefits, it also can carry with it a number of disadvantages. These disadvantages are based largely on your work environment. If you're one of the lucky ones and work in a fun, friendly, metally challenging atmosphere, on a project you find interesting, then why oh why are you thinking about going independent? If, however, you are one of the millions who find themselves dreading waking up the next day, as it only means another hour-long commute through traffic to an office building you've dreamed about destroying, then self-employment looks better each day.
Working for yourself carries with it a lot of freedom. You are your own boss. You can wake up whenever you please. Your morning commute is likely to your home-based office. If you want to take off the afternoon, no one is stopping you. You can spend an hour writing a blog entry on going independent. Of course, with that freedom comes responsibility. When you take that hour to write a blog entry, you're not getting paid. If you roll out of bed "whenever," you'll likely find yourself not motivated to start the day working.
For some people, working for yourself can have a strong effect on their own sense of self-worth. That is, there are some folks who, if they work for a company that goes bankrupt, they simply find another job and don't interalize the company's demise. If, however, they were to work for themselves, and didn't succeed, they'd take the failure as a comment on their own personal worth and capabilities. People who tie their business success to their personal worth should steer clear of starting their own business, as the vast majority of businesses fail. Those who are really successful at business typically fail more than they succeed. (Donald Trump, for example, has gone bankrupt before. Billionaire Paul Allen, co-founder of Microsoft, has had many investments since his departure from Microsoft that have not panned out. Steve Jobs has had many successes - and many failures - at Apple, being fired from his own company at one point in time.)
The point is, even in a successful business, there will always be setbacks. If you do trek out on your own, it is important to take these setbacks in context. Do not let the setback discourage you from continuing, or deminish your sense of self-worth. Rather, when those setbacks to happen, step back, observe, learn, and move forward.
Moving Forward
I plan on writing future entries about this topic. I'd like to follow this entry with one on the legal issues surrounding starting your own business. Namely, what options exist for forming a business, and what tax/legal implications they involve. In the meantime, for more information let me recommend Johnathan Goodyear's articles on going independent. In Part 1 Johnathan looks at how to determine if you have the will and personality to be an independent consultant; in Part 2, Johnathan examines techniques for marketing yourself to attract future business.