Freelancers know that time is money. Whether you bill by the hour or project, the amount of money you make is largely a function of how much time you put in — and you can only work so many hours.
Are you interested in moving beyond the time-is-money constraint? You might be ready to turn your solo freelancing into a business.
If you succeed, your earnings will no longer be tied to the number of hours you put in. Instead, you can hire staff, leverage their skills, and take on more clients.
That potential upside, however, comes with plenty of risk, hard work, long hours, and duties you probably haven’t had to worry about as a freelancer. Let’s look at how to become a small business owner and what that entails.
Prepare to shift gears
Before pursuing a business, ask yourself if you are ready to give up the flexibility that freelancing can offer. Your income might be limited by the hours you work, but freelancing allows you to arrange your work hours to accommodate your schedule preferences. For example, you can plan around a morning gym class, a vacation, or your night-owl tendencies. When becoming a small business owner, you might find more demands on your time and less flexibility in meeting them.
You might also spend less time doing the actual work on which you’ve built your freelancing career. As your business grows, you will likely hire people to take over some of the legwork, and you’ll spend more time chasing clients, recruiting employees, managing staff, planning, and keeping the books. Make sure you’re willing to step back from your craft and take on more of a management role.
Know your market to distinguish yourself
If your freelance work is robust enough to consider turning it into a small business, then you already know something about landing clients. You probably have a solid list, but think about what kind of clients your business will target. If your current book of business is diverse, will you continue on that path? Can you be more competitive by focusing on and marketing your expertise to a specific market segment?
Identify the players you’ll go up against in the marketplace and figure out what will set you apart, including:
- Choosing an original and memorable name.
- Identifying your strengths and weaknesses, as well as any obstacles to success in your industry.
- Determining the going rate for your services and what you plan to charge. If your rates increase from what you charge now as a freelancer, will you be able to retain your clients?
Creating a Business Plan
Write a business plan to set a path for your company. If you seek bank financing for the business, this is essential. As part of the business plan, you should detail what you need money for and how you will spend it. Consider startup costs like equipment, office space, signage, insurance, phone and Internet service, licenses and permits, website and logo design, and salaries and benefits. You’ll also want to include some financial projections in your business plan.
Even if you don’t need outside funding, a business plan will help you think through your operations, costs, and strategy. You can learn more about writing a business plan from the U.S. Small Business Administration.
Work out the legal details
As a freelancer, the government recognizes you as a sole proprietorship, even if you took no action to declare yourself as such. Essentially, this means that you and your business are one and the same, and your earnings are taxed as your income. The downside is that your personal assets are not separate from your business, and you can be held personally liable for any debts or lawsuits you face professionally.
Shifting to a business adds complexity and risk to your work, and you should consider alternative legal structures like a partnership, a limited liability company, or a corporation. These structures can protect your personal assets if you encounter a lawsuit or bankruptcy; they also dictate how you pay income taxes and how you can raise money. Consult a lawyer or accountant to make sure you choose the best structure for your business.
Once you choose a legal structure, register your business with state and local governments and obtain any necessary permits specific to your industry. You will also need to apply for an Employer Identification Number, which is like a Social Security Number for a business.
Finally, purchase any relevant insurance, like commercial property insurance, general liability insurance, and professional liability insurance, to protect your business from risks like lawsuits and property damage.
Making the switch from freelancer to a business owner is an exciting venture, but you want to be sure you’re prepared to take on the added responsibilities. Before you make your decision, consider what needs to be done to make sure it’s the right step for you.