What is Self Employment?
Self employment is when you’re the only person on payroll. Right? Or is self employment when you’re a consultant at a company who participates in staff meetings but can say “yes” or “no” to work anytime, for no reason because it says you can in your contract? Are Lyft and Uber drivers self-employed? This article will answer all these questions and more so you can consider whether you’re a self-employed kinda person…or not.
The Pros and Cons of Being Self-Employed
It’s basically the pros and cons of being single vs. being married. OK, that’s not exactly a perfect analogy, but when you’re self-employed, you can have multiple partners, go where you wanna go, do what you wanna do. When you’re an employee, your employer is your loyal spouse who expects a minimum 40 hours per week of your time, sometimes more, because the pace of the online economy is HELLA FAST. And if you’re really committed, you’ll have a 401K that grows over time, plus really amazing health insurance for your whole family.
The Advantages of Being Self-Employed
If you are a natural driver of your own life, switching to self-employment can be a dream. In the driver’s seat, you are in complete control of the speed, direction and pit stops. It can be a very freeing, new reality for someone who has been trying to fit into a more traditional style of work dynamic. Is this you? If so, the next question to ask yourself is, “What kind of driver are you?”
If you’re fast and a bit reckless while knowing exactly when to turn, you might totally thrive as a self-employed person. You’ll rarely get bored as there is always something to do, something to say, something to negotiate, something to learn.
If your natural driving pace is easygoing, weaving in and out of traffic like a meditating monk and taking breaks when you need to, you can also thrive as a self-employed person, especially if you have clients who value quality and thoughtful work that is time-intensive.
Regardless of how you drive, communicating your style to your clients is key.
Self-employment can also be rewarding in terms of finances and work routine. When you become self-employed, you are in full control of your work. You can structure your work environment however you want. For example, instead of commuting to an office, you can set up a desk at home and work remotely, or sit in a cafe where you can meet other self-employed people.
You do not have to follow the many rules and policies of established companies and you can make your work decisions by yourself. This way, you can set your goals and achieve them with dedication and the spirit of entrepreneurship.
Becoming self-employed also allows you to create your own schedule. This way, you find a work-life balance. When you create your own schedule, all you have to consider is your own vision. You would know the precise hours of work you need to achieve your business goals.
The flexibility of self-employment will also let you have your time off when you wouldn’t have to request a leave approval. Besides the freedom of making your own schedule, you’ll also have the freedom of creativity. It means that you can be creative without the limitations and restrictions that come with being an employee.
Entrepreneurship requires creativity. If you have that mindset, the chances are that you will feel trapped in a work environment that diminishes your creative side. Thus, it is time to say goodbye to monotonous work and set up your own business.
Building your own business will let you shape every component of your work life. Another advantage that comes with becoming self-employed is that you can design and sell your products or services according to yourself. You can work whenever you want.
Here are other advantages of self-employment.
- You can build your own network
- You follow your own business plan
- Your income depends on your work initiatives
- You’re the business owner
- You do not have to follow pre-existing rules
- No toxic workplace environment
The Disadvantages of Being Self-Employed
Continuing with the analogy of driving, if you are the type of person who prefers someone else in the driver’s seat while you play games on your mobile phone, you may want to think twice about switching to self-employment. As an employed person, you usually have a set schedule and a paycheck you can depend on every two weeks or once per month. Your employer will take taxes out of your paycheck for you, manage the accounting and navigate the business strategy.
Not so once you become self-employed!
Being your own boss means there is no room for procrastination. You have to get things done, which means you may end up working more than 40 hours per week because you’re doing the jobs of several people. You’re responsible for managing your taxes, health insurance, vacation time, sick leave, retirement plan and building networks.
Here are some other disadvantages of self-employment.
- Initially, you will have an unstable income
- It will take time to build a target market
- No guarantee of success
- You may need to take on debt via loans, credit card, etc.
Down the road, you can hire a virtual assistant to help with the multiple tasks of self-employment, but this is dependent on how much you’re earning and how much you can afford out of your bottom line. In other words, running the business of ME,Inc all day long, seven days a week can be exhausting. If you prefer the passenger seat, at least from a professional perspective, self-employment may not be for you.
But if you’re not spooked by these disadvantages, read on!
The Types of Self-Employment
Freelance
Freelancers are like the professional football and basketball players who travel from team-to-team. Or the traveling nurses you’ve heard so much about during the pandemic. Freelancers fill out a 1099-MISC form in exchange for a service. They can work for hourly or flat rates through platforms like Upwork.com or Thumbtack. It all depends on the agreement between customer and freelancer. Freelancers who make more than $400 per year, have to file taxes. Freelancers also need to make quarterly estimated payments to the IRS.
Consultant
This is probably the most fancy of the self-employment types. It’s like, “I am an expert in this subject and now I am charging a premium for my IP.” No judgments. It’s a great way to make way more money once you’ve accumulated knowledge as a freelancer or as a full-time employee. Just make sure you’re actually an “expert” by taking a personal evaluation (see below!). Consultants also need to make quarterly estimated payments to the IRS.
Small Business
A small business can sell services or goods or both. Unlike freelancers and consultants, small businesses have their own branding and products. A small business is a local beauty salon while the beauticians inside the salon are freelancers or consultants.
Sole Proprietor or Sole Trader
A sole trader is a business owner that keeps all the profit after paying taxes. Sole traders are also known as sole proprietors.
The sole proprietorship is operated by self-employed individuals who take complete responsibility for unlimited liabilities. Thus, they generate an income from the cheapest business structures. Like sole traders, they manage every aspect of their business. Lyft and Uber drivers are technically classified as sole proprietors.
Startup
A startup is a company in its initial stages of business. This means that the founders finance the startup and earn a very limited income until the business stabilizes. Startups also attract outside investment. But startups require a high initial cost of setting up and generating limited revenue. After the business takes off, a startup can become a successful company that generates stable income.
Startups come with one major downside, which is the risk of failure. To minimize this risk, you must have innovative strategies and funding sources. Funding sources include family, friends, crowdfunding, loans – not to mention the most important funding source: revenue generated from the actual startup.
Startups have a certain allure to them because they’re in the idea phase before an investment banker comes along and asks how the startup generates revenue. In other words, you need a business model to demonstrate your success potential. Either that or someone doing it better may replace you! Yeah. It’s brutal out here, as Olivia Rodrigo sings.
How to Become Self-Employed
Now that we have discussed the various types of self-employment along with the advantages and disadvantages, it is time for you to rethink your job. Let’s begin by doing a personal evaluation that will lead to self-employment.
Do a Personal Evaluation and Make a Decision to Work For Yourself
Remember when your teacher or boss gave you evaluations? Like, on a scale of one to 10, how’s your attention to detail? Are you responsible? Do you make up imaginary deadlines all the time so you can finish projects? Do you say yes to every project or can you sometimes say no in order to better curate your time? There are a few online personal evaluation tools that can help you take your own temperature before diving into the cold waters of self employment.
Personal evaluation is necessary because it helps you understand your motivation towards your business objectives. You need to ask yourself why you’re starting your own business and what set of skills you can utilize to make your startup successful.
Suppose you’re passionate about cooking, and you want to set up a restaurant. In that case, you need to evaluate your cooking skills and understand how to monetize them to bring something new to the market. This way, you can think of ways to make your business stand out from competitors. So it’s vital to do your research to make the idea viable.
You should also consider timing. Most businesses take some time to flourish. Until then, it is wise to hold onto your job because it provides you with some financial security until your business setup starts generating stable revenue. This means you should also be prepared for long work hours and setbacks when you execute your business plan.
Choose Your Niche and Target Market
Huh? What’s a niche? What’s a target market? Great questions.
Niche is a French word to describe whatever little quirk of the human experience you are attempting to leverage. For example, creating data visualizations is a niche skill and product within the data analytics industry.
Target market is a demographic or group of people you know are interested in your services and/or products. Journalistic or information-based organizations will be the target market in need of data visualizations. That’s the most obvious target market. But if you can identify more specific target markets, this can separate your niche from competitors. For example, Etsy targets people looking for handmade art, clothes, furniture and more. Etsy is not an obvious target market for data visualizations, but if you search for “data visualization” on Etsy, the results are totally different from what you’ll find on search engines or Amazon.
When you choose a niche, you should have a fair amount of knowledge about it. This will help you speak more authentically and passionately to the target audience. You should also choose a profitable niche that is in demand. Therefore, you won’t have to convince your target audience to invest in your service/product. It also helps to find a “pain point,” which is a specific problem faced by current or prospective customers in the marketplace. Then you can position your product or service as a solution, and your target audience will be willing to invest money. For example, maybe the data visualization skills you use to create interactive maps and graphs in the health tech industry can also benefit writers who want to visualize the ups and downs of conflict in their screenplays or novels.
Make Your Business Legal
Now that you’ve chosen a niche, it’s time to decide on the structure for your self-employment. Should you set up an LLC? Inc? S Corp? B Corp? No corp? Which one is the correct one for you?
- Sole Proprietor
As described above, Lyft and Uber drivers are technically classified as sole proprietors.
In a sole proprietorship structure, one person owns the business and runs its operations. It is the most common business structure because it is the simplest to set up. If you plan to work alone, this may be the right structure for you. Keep in mind that in a sole proprietorship, you, as the owner, are personally liable for all of the business’s financial obligations such as debt and losses. This structure works well for low-risk, home-based or retail businesses. A sole proprietorship can also allow an owner to test their business idea before creating a more formal company.
- Partnership
In a partnership business structure, two or more people own and operate the business. There are two types of partnerships:
General partnerships: The partners hold an equal role in owning and operating the company as well as liability for its debts, other partners’ actions or financial obligations. This type of business structure is also known as a “limited liability partnership (LLP).”
Limited partnerships: A limited partnership (LP) includes general and limited partners. The general partners hold the same role and liability as they would in a general partnership. The limited partners, usually investors, have limited control or input into the company along with limited or no liability. Profits are reflected in personal tax returns.
A partnership is the simplest structure for multi-owner companies or professional groups. It also allows owners to test a business idea before establishing a more formal company
- Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid business structure that lets you take advantage of aspects of partnerships and corporations. To set up an LLC, you must file paperwork with the secretary of state of the state in which you plan to do business. This structure works well if you have a medium- or high-risk business, want to protect your personal assets or pay a lower tax rate than you would with a corporation.
- Corporation
In a corporation, the company is considered an entity that is independent of its owners. This makes it more complex and expensive than most other business structures since it must comply with more regulations, record-keeping and tax requirements. You may want to choose a corporation structure, also known as a “C corp,” if you have an already established medium- or high-risk business, need to raise funds, have plans to take the company public or sell it.
There are other types of business structures, but these are the most popular for self-employed people. You may want to find a lawyer and an accountant who can guide you through setting up a legal business in your city. It would help if you also made separate business and personal accounts to manage finances.
Create a Business Plan
If you’re still reading at this point, you’re probably ready to draft a business plan. It can be hard to do this if your expertise is NOT business. The best way to start is by gathering some facts:
- What are my personal goals?
- What is the purpose of my business?
- Who is my target audience?
- How do I target that audience?
- Who are my competitors?
- What is my product/service description so my audience understands what my business offers?
- Who is on my team and what are their responsibilities?
- What do my finances look like?
- How much are my costs compared to my income?
Then you need to develop a vision to understand the future of your business by identifying strategic objectives and making tactical plans to achieve your business objectives. Yeah, it’s like playing chess, so if you naturally lie awake at night, envisioning strategic moves like the main character in the Queen’s Gambit, you’ve got the right mindset for self-employment.
A blueprint of your business will help guide you in the startup process and push your business toward success when it is in the early stages. Making a business plan does not have to be difficult, especially if you narrow your focus to the following:
- An executive summary of your plan so that you know what you want to accomplish
- The financing required
- A business description (an industry overview)
- A marketing strategy to help attract consumers
- Analysis of competitive set and identification of your own strengths and weaknesses
- Your product/service description showcasing your business offer
- Management and operations to describe team member responsibilities
- Financial plan that details associated costs and your path to a stable income
Get Financed and Make Investment
Once you have your business strategy in black and white, it is time to get financed. So how do you take out the startup cost for your business? When starting, it is common for businesses to run from savings.
However, you need to have a financial plan to fund your business in the long run. Here are some ideas that will help you manage your business finances.
Tap Your Savings
Once you know the costs of your startup, you can choose to use your savings to fund your business. According to Indeed.com, you should be able to successfully run the business for a minimum of six months without any profits from customers or clients. If not, keep your job and build your business as a side hustle. This way, you can use your salary from your part-time job to support your business until you start making profit.
Take a Business Loan
If you don’t want to pull funds from your savings account, a loan might be an attractive alternative. You can apply for a small business loan from a bank, which will ask you to provide a business plan. Then you can use the loan to resolve cash flow problems and leverage growth opportunities.
Use Crowdfunding
Crowdfunding is the practice of funding a project by raising money from different people, usually online. Platforms like Kickstarter, GoFundMe, or Indiegogo allow you to set up a profile with your funding goal. When you share your profile with your network, those who are interested can donate in exchange for rewards from your company. There are restrictions on the uses of the funds, depending on the platform, so be sure to match your needs with each platform’s guidelines.
Launch a Marketing Campaign
Crowdfunding can be a marketing campaign in itself, but a larger, ongoing marketing campaign is crucial for attracting the target audience to your product or service. Delivering good products and services in itself is also part of a larger, overall marketing strategy to convert target audiences into clients.
Make Connections and Build Your Network
Do your friends and family know what you do? You may be surprised that your aunts and cousins have no idea what you’re doing on your computer all day long. They may assume you’re playing video games or watching cat videos on YouTube. But if they know you are building, designing and managing websites for nonprofit organizations, they can refer you when they meet someone who needs that service.
Making connections to build your network is vital in establishing a successful business. In the early stages of self employment, you need as many brand ambassadors as you can get, so it’s important your networks understand what you do. LinkedIn is the social media platform of choice for many self-employed people to create awareness about their business. Building a network will also help you get feedback. You can use the feedback to improve your business.
You should set up your business website because this becomes your digital business card when meeting new, potential clients and customers. This way, more people will trust your business.
Quit Your Job and Become Self-Employed
Once you come up with a smart business strategy, utilize it to set up a steady flow of customers and clients, and generate income higher than the salary at your full-time job, it’s probably a good time to call yourself officially “self-employed.”
You can safely resign from your full-time job. Take your time with thinking through this decision before you go ahead with it. And good luck!
