How to Run a Successful Self-Employed Contracting Business
Becoming a self-employed contractor has many advantages. Starting your own business, being the boss and calling the shots is very attractive to anyone with an entrepreneurial urge. It can also be one of the easiest ways to transition from full-time employment to running your own business provided you have solid skills and experience in your profession. The freelance market is booming as many businesses today (even very large ones) require a more flexible "just-in-time" workforce and prefer to employ contractors rather than full-time employees. In many professions becoming self-employed is no longer a matter of choice.
However, self-employment has its challenges and you should fully understand and prepare for all aspects of entrepreneurship in order to avoid unpleasant surprises down the road. Here's what you need to know to start and build a successful business as a self-employed contractor.
Be Sure You Want to Be Self-Employed
Does self-employment suit your life circumstances?
If you are fortunate enough to have (or be able to get) well-paid, secure employment with benefits and reasonable job satisfaction it may not make sense to become self-employed, no matter how great your desire to become an entrepreneur.
Organizing vacations, making major purchases, and planning retirement are much easier (and less stressful) when you have a steady paycheck and regular working hours, particularly if you have dependents.
Thoroughly examine your lifestyle, financial situation, and future retirement goals before making the jump to self-employment (and discuss with spouse and family members).
Is your personality suited to self-employment?
Being your own boss has many advantages, but it also means all the responsibility for the success of your business (including income) rests on your shoulders. If your personality is such that dealing with the uncertainties of self-employment is likely to cause you a great deal of stress and anxiety then being an entrepreneur is probably not for you.
Get Financing in Place Beforehand
Depending on the type of contracting business you intend to start, how much capital (if any) will you need for business premises, machinery, equipment, etc.? Capital financing may not be an issue for a computer consultant who can start a home-based consulting business with only a laptop and mobile phone, but starting an excavating business, for instance, may require hundreds of thousands of dollars in equipment.
In addition to capital financing you will need to cover business and personal expenses until your business generates income, Even if you already have clients when you start the business it may be months before you get paid for the completion of your first project.
Before you make the jump to becoming a contractor, perform a complete review of your finances and estimate your needs as closely as possible, then (if needed) consider possible sources of financing such as family, friends, or business loans from financial institutions (spoiler alert — it is virtually impossible to get financing for a new business from a bank unless you have sufficient collateral in the form of personal assets).
If financing is required and you intend to seek loans or capital investment from equity investors then you will need to have a comprehensive outline of your financial requirements as part of your business plan.
Create a Business Plan
Do you need a business plan? If, for example, you are in the fortunate position of being able to leave your current full-time job and be immediately rehired as a contractor, or are starting a business with clients already in place and no financing requirements, then perhaps not.
For most startup businesses, however, there are many reasons to have a business plan:
- To test the feasibility of your business idea by performing market research as part of the market analysis section of the plan.
- To describe how you will market your products and services to customers in the marketing section of the plan.
- To obtain financing or attract investors — as previously mentioned if you intend to seek debt financing from a bank or equity financing from angel investors you must have a solid business plan in place.
- To forecast for future expansion such as acquiring new equipment, hire employees or subcontractors, etc.
Having a solid business plan and updating it on a regular basis gives you a blueprint for success.
Name, Register, and Insure Your Contracting Business
Before you open your doors and start taking on any clients as a contractor, you will need to:
- Decide how your business will be legally structured — do you need to incorporate or can you operate as a sole-proprietorship? In many professions, being incorporated is a requirement. If you intend to incorporate, do so before signing any contracts with clients.
- Decide on a business name and register it if required.
- Insure your business as required. For example, will you need general liability insurance? Professional Liability? Errors and omissions? A claim against your business that is not covered by insurance could be financially catastrophic, especially if your business is not incorporated. Be aware that home insurance will not cover business activities from home.
- Get a business bank account.
Market Your Business
When starting a new consulting business the major challenge is usually getting the first few paying customers. If you have transitioned from a full-time job in the same profession you may have the advantage of having potential clients already. If not you should reach out to friends, family, and business contacts prior to opening your doors. Advance word-of-mouth can help you gain clients much more quickly, in addition to getting feedback about the potential of your business idea.
Be Your Own Accountant, for Starters
During the startup phase of your business, you can save money on accounting fees by using free time to organize how you want to keep your books, invoice your customers, etc.
Accounting software can greatly simplify your bookkeeping chores. Many of the new cloud-based accounting software packages such as FreshBooks and Zoho offer ideal starter packages for self-employed contractors that include invoicing, expense tracking, and simple reporting for around $10 per month, including mobile applications.
If you are loath to do your own bookkeeping you can always hire a bookkeeper or accountant to perform these duties once you become busy with clients.
Be Professional at All Times
Whatever your profession, look and act the part at all times. Potential customers who don't know you will be turned off by inappropriate dress or behavior on your part.
Being professional also means answering the phone properly, using voice mail, and responding promptly to messages or emails. In today's world of online reviews and social media, developing a reputation for poor customer service can quickly become disastrous for your business.
If you intend to conduct business from home and need to meet with clients, make sure you have a separate properly equipped and furnished home office space.
Build Your Reputation With Best Practices
The ideal client is one you keep for the life of your business. To do so you need to rise above the competition by:
- Developing a reputation for honesty and integrity
- Under-promising and over-delivering
- Making good on all mistakes
- Treating every client as special — thank them and reward them on holidays and special occasions.
Over-extending yourself and making impossible promises is a sure way to lose customers in the long term.
Avoid Potential Tax Issues by Having More Than One Client
One of the biggest advantages of self-employment is the ability to deduct expenses from taxes. Unfortunately, abuses of the practice can lead to scrutiny from the tax authorities. If you work exclusively for a single employer (even if you are incorporated) you risk being considered an employee by the IRS or a Personal Services Corporation by the CRA and losing the ability to claim the Small Business Deduction and other standard business deductions. You are especially at risk if you have converted from an employee to a contractor and continue working for the same company on a full-time basis.
The easiest way to ensure that you retain your status as an independent contractor is to have multiple clients. If you are unsure about your status as an independent contractor, discuss the issue with your accountant.
Don't Try to do Everything — Outsource If You Need To
If your business is growing and you are finding that there are not enough hours in the day consider sub-contracting some of your non-core tasks. Do you really want to be your own web designer or manage your business social media postings? Or deliver product to your customers yourself? Or make your own travel arrangements? Or keep your own books and do your own taxes?
Outsourcing some of these ancillary tasks can free up more time to focus on your core business activities. Having family members that can perform some of these duties is ideal — whatever you pay them can be deducted as a business expense.
Don't Be in a Hurry to Expand Unless You Are Ready, Willing, and Able
Many successful contracting businesses reach a point where further expansion would require hiring additional people to handle the increased workload. For example, a self-employed IT contractor may be faced with deciding whether to bid on a contract that requires a multi-person team to complete or to pass on the opportunity.
Hiring (or contracting) additional personnel is a difficult decision and many self-employed contractors prefer to remain solo for a number of reasons:
- The more specialized your business, the more difficult it may be to find qualified people.
- Advertising, vetting resumes, and interviewing is very time-consuming. Once hired, training, supervision, and related paperwork will require more of your time on an ongoing basis. Paperwork is particularly problematic with hiring employees rather than contractors, as payroll requires tax (and other) deductions and increases your accounting overhead.
- Unless additional personnel generates more income than the cost of their employment, your profits will not increase.
- The reputation of your business may suffer if whoever you hire does not perform at the expected level.
On the other hand, if your ambition is to build a larger business and you have the time and energy to put into expansion then, by all means, take the plunge.
Don't Forget the Rest of Your Life
Try not to let your business become your entire life — a well balanced, healthy lifestyle includes a proper diet, exercise, and time for personal relationships with family and friends. Putting all your time and energy into your business to earn money for retirement or other purposes is pointless if it leads to declining physical and/or mental health.
Be a great entrepreneur — and be an even better person.