There is something endlessly alluring about being your own boss. No more stressing about office politics, performance reviews or meaningless deadlines. And no more killing yourself to make someone else rich. It's not hard to see the appeal. So what is stopping you?
"...Uncertainty is scary. For most people this fear of the unknown prevents them from ever chasing their dreams..."
For most people it is the uncertainty and fear of the unknown. How much money will I make? Will it be enough? Will my business venture be a success? How will I find clients and will I be able to find enough? Uncertainty is scary. For most people this fear of the unknown prevents them from ever chasing their dreams. This is why the majority of people spend their lives working hard to make someone else rich.
The good news is, there is a lot you can do to reduce this uncertainty to manageable levels. For every person what constitutes a manageable level is different, but that is ok. It is possible for even the most risk averse person to be their own boss, it might just take a little longer for some than others.
There are two keys to making the leap from wage slave to boss. The first is research and planning. A lot of information on the questions above can be answered with good research and planning. See our article
Budget Friendly: Take control of your finances
to learn all about doing a personal budget. This will tell you how much money you need. That is step one.
Then see our article
(Business) Planning to succeed.
By following the advice in this article and really working hard at doing thorough research you can gain a lot of insight into whether your business idea is viable, how long it will take to start generating cash, how much cash it will generate and how much it will cost to set up. This should give you a really good understanding of whether or not you are ready to become your own boss.
The second key is take it slow. If you are convinced that your idea is a winner and the life of an entrepreneur is for you, but you are still too daunted to take that leap into the unknown read our article
Learning to Fly.
This is a great piece on why there is a very good chance that throwing in your steady job to chase your crazy business idea is a bad idea. There is also a very good chance that your crazy business idea is a great idea. The key to finding out without facing financial ruin is to bootstrap your idea from the side of your desk. This means keeping your day job and building your business slowly in your spare time using your own savings.
It may be that this approach requires a few years of super hard slog. Of giving up your evenings and weekends and neglecting your relationships. This isn’t for everyone. But neither is entrepreneurship.
There is of course a third option. A kind of half-way house between being a business owner and an employee, and that is contracting or freelancing. As a contractor or freelancer you work for someone else’s business, so it is somewhat simpler than being an actual business owner. However you generally work through a limited company, completing specific assignments that you have specialist skills, knowledge and experience in. You still need to market yourself, find business to work for and deliver a quality product, so there is still a significant entrepreneurial element to it. However you often use recruitment agencies and have job interviews to find the work. And generally people have a series of short to medium term full time engagements, one after the other. So there is still many of the familiar elements of being an employee.
As a contractor you tend to have a short notice period, often a week, but sometimes even just a day. This means that like an entrepreneur you have to prove yourself every day. If you output is not up to scratch you could be out the door very quickly. However his also gives you a degree of control over your job that an employee does not get. If you don’t like the roll you are in you can always find another one and leave. If you think you deserve more money or more prestige you can always find it elsewhere. You are in control. You don’t need to play corporate politics. Your pay rises and promotions are not at the whim of your boss or tied to the performance of a business you likely have a limited amount of influence over. Never again will you spend a year fretting about your bonus, and killing yourself to try to ensure it is satisfactory, only to be disappointed and promised more next year. For many this additional control and freedom can be extremely liberating and a great first step into the world of business ownership.
In the UK there are tax advantages of contracting over being an employee, but you also need to be aware of IR35. Now is not the time or place for an in depth discussion of IR35, but you do need to be aware of it. Just briefly, if you are a limited company owner and your income goes into your limited company you can reduce your personal tax and national insurance by taking the money out of the company as a mix of wages and dividends. This has the potential to be tax advantageous over just receiving wages like an employee would. The IR35 rules state that if you are really an employee, who is just using a limited company to gain a tax advantage then you should actually pay the same tax as an employee. For a summary of IR35 and discussion of the recent changes see
IR35: What's changed and what now?
And for advice on how to ensure you remain unaffected by IR35 as a contractor see
IR35: Why you still have a voice.
Over time contracting can often evolve into a genuine consulting business. As you complete contracts or freelance gigs you build up contacts and knowledge of other peoples businesses. If you do a good job these people will often want you back, and also recommend you to others. It is through this repeat business and referrals that your contracting business can become a consultancy.
If you feel contracting may be your way forward do read
(Business) Planning to succeed.
Don’t make the mistake of thinking contracting is not a genuine business and therefore a business plan is not required. A lot of the concepts are still relevant, and thinking about them in advance could save you from getting into a pickle later.
"..through this repeat business and referrals ... your contracting business can become a consultancy..."
As a contractor you will need to choose a legal structure - will you work through a limited company, an umbrella company or be a sole trader. There are pros and cons to each. The key is to understand which option best fits with what you plan to do. This is also likely to be influenced by your IR35 status.
If you are inside IR35 you will need to pay PAYE tax and National Insurance (NI). The easiest option here is to use an umbrella company, who will handle this for you. However you need to be careful and do your due diligence as this is an unregulated industry and there are some unscrupulous operators. Be sure to choose one with a very transparent charging structure. An alternative is a fixed term contract, directly with the hirer. In this situation you personally contract directly with the hirer and they withhold the tax an NI. This can be slightly less tax advantageous than an umbrella company, but some hirers insist on it, and it saves on the umbrella company fees.
If you are outside IR35 you will most likely wish to avail yourself of the asset protection and tax advantages that a limited company will afford you. The tax advantages were briefly touched upon above. As long as you don’t breach your directors duties working through a limited company means if you find yourself in litigation for some reason only the assets of the company are at risk. Your personal assets are protected. To ensure you don’t breach your directors duties read
7 Things Every Company Director Must Know.
As a contractor you forego the safety and security of a guaranteed regular pay cheque. Everything I said above about the flexibility of having a short notice period. It has a flip side. Contractors know that they are always instantly dispensable and there is no chance of a redundancy payment to soften the blow. Generally contractors are compensated for this insecurity with slightly higher remuneration. However it is important as a contractor to maintain a war chest. That is a pot of money set aside to see you through any period without work.
How big should your war chest be? Read
Budget Friendly: Take control of your finances
, do a personal budget and work out your personal cash burn rate. Ie, how much cash do you get through in a given period.
Then read (Business) Planning to succeed.
Research your industry. Get an idea of the day rate you will be able to command. Also get an understanding of the demand for your skills and the competitive landscape. From this you should be able to estimate how often you can expect to be in work. This will tell you how much you can expect to earn. Finally are there likely to be any start-up costs such as any equipment you’ll be expected to provide or any accreditation you may need?
Once you know much you spend, how much you’re likely to earn and what your start-up costs will be you should have a pretty good idea of how much needs to be in your war chest. If you are a nervous type maybe add a 50% buffer for unforeseen setbacks. It’ll help you sleep at night.
All you need to do now is check your bank account. How much is in there? If its more than the war chest you’ve calculated then you’re ready to go!
If your bank balance is nowhere near your calculated war chest, and you think it never will be, perhaps the best option is to re-read
Learning to Fly
and think about a side hustle rather than contracting.
Good luck! And do let me know how you get on, or if you have any questions just post a comment below.