What We’ll Cover In This Piece:
- Why the business world is moving away from full-time employees.
- Why being an independent business is better for you and consulting firms.
- How to get your independent business set up and running in an afternoon.
Estimated Time to Read: 8 minutes
One of the major economic trends of the 21st century will be the shift to what many are calling the “Individual economy,” in which work that is currently done by full-time employees will be done by contract workers.
You’ve probably seen this dissected in business articles with titles like “The Death of The Full-Time Employee,” but for all the drama and speculation, no one’s answered the most important question:
What does the “individual economy” mean for you as a consultant or contractor?
The short answer is this: If you’re a consultant or contractor, you’re a business now.
Let me unpack this. In the past, you’ve almost certainly been part of an employee-employer relationship. You’ve worked full-time for one company, trading your time for a salary.
In the individual economy, however, the standard employer-employee relationship is gone. In its place is the client-contractor relationship, in which professionals like you operate as independent businesses, servicing as many companies (clients) as they like.
This shift should seem familiar to you. If you’ve ever called an Uber or hired a TaskRabbit, you’ve been on the client side of the contractor relationship (though most people would call this the “gig economy” the basic idea is the same).
Services like Uber and TaskRabbit are just the beginning. The change is only going to get bigger, and it’s going to expand to other parts of the economy, like professionals. In fact, as the individual economy grows, most professionals—lawyers, accountants, consultants, etc.—are going to be independent businesses.
A lot of consultants are afraid of this change. We disagree with them. We think consultants should be excited. If you are a consultant, we think this is the best thing to ever happen to you professionally.
Why You Should Be Happy You’re A Business
I understand why so many consultants are nervous about becoming independent businesses. We traditionally associate the phrase “full-time” with stability. As a full-time employee you typically have benefits, a predictable salary, a 401k, severance pay if you’re fired—it’s a lot to give up.
Fortunately, you don’t have to. By being an independent business, you can have the same stability, make more money, keep more money from the government, and be happier in your work than were you were as a employee.
How You Make More Money As A Consultant/Contractor
If you are an employee taking a regular salary, you’re leaving money on the table. Your salary doesn’t change regardless of how many hours work.
However, if you are an independent consultant or contractor, you set your own bill rate and hours worked. The firm that connects you to your client will take some percentage, but your billed hours still translate directly to your income.
You work more, you make more. It’s that simple.
The other financial benefit to being an independent business is the money you save on taxes.
The entire U.S. tax code is built to incentivize business ownership. There is no better way to lower the amount you pay in taxes, and keep more money, than to start your own business.
As a full-time employee (as I’m sure you’re painfully aware), all of your income is taxed. If you make $250,000, you pay taxes on $250,000.
As a business, however, your business expenses are not taxed. If your firm makes $250,000, but you invested$150,000 of that back into the business, you only pay income taxes on $100,000.
What makes this amazing for you is that when you’re a business, you can include business purchases that also benefit your personal life in your write-offs. This includes:
- Office space in your home (effectively tax free rental income to you)
- Technology (computers, TVs, phones, wireless routers, iPads, etc)
- Business-related dinners
- Business-related travel
The steep discount the government gives on these business expenses is the single greatest tax benefit you’ll find.
But the benefits of being your own business go beyond the financial. The personal benefits of being a business are incredible.
Why Owning A Business Makes Your Personal Life Better
You don’t accidentally become a professional. If you’re a successful consultant, you spent years developing your skills and making the connections you needed to succeed.
You did grunt work, you studied hard to learn new industries and functions, you took tough feedback from your mentors and pushed yourself to develop new skills.
You should be proud of that.
In order to achieve all those things, you must be a person who takes control of your life. You make the major decisions about where your life goes, you put in the work required to make things happen, and when you’re done, you get to look back and take pride in what you’ve achieved for yourself.
Owning your own company takes that pride and amplifies it.
You control who you work for, what services you offer, and how you build your business. When a client hires you, they’re hiring all of those experiences, skills and relationships that you’ve invested to build.
I’ve never met a person more fulfilled or proud of their life than a successful business owner. Someone who can look back and point not just to the career they forged, but the business they built from the ground up. Even if it’s a one-person business.
The other side of owning your own business is that your work-life balance is completely up to you. Maybe you don’t take meetings after 4 pm so you can spend time with your family. Or maybe you don’t work on Fridays.
If you’re working for someone else, that’s a conflict. If you’re a business, those are your hours.
Why Staffing Firms Want You To Be A Business
This is where a lot of consultants get hung up. They can see the upside to being their own business for them, but they can’t see why a firm would want a contractor instead of a salaried employee.
Think of it from a consulting firm’s perspective. If the firm is paying you a consistent salary, then the cost (and risk) you represent to them doesn’t change. If they bill a client 200 or 10 hours for you in a month, you cost them the same amount of money.
Every single consultant the firm brings on as a full-time employee is, to some degree, a financial burden to the firm. If the firm suddenly loses work, they have to pay severance, lay people off, and deal with the expensive inconvenience of downsizing.
Alternatively, if the firm brings on a bunch of new work, they have to weigh stretching their current workforce thin versus hiring a bunch of new talent they might not need in six months.
Simply put, full-time employees make it impossible to be flexible. That’s why most consulting firms have adopted flexible workforce solutions (FWS), which are teams comprised of contracted professionals who each operate as independent businesses.
Firms can scale on-demand now, hiring consultants as needed and paying them on a project-to-project basis.
If you’re looking for work as a consultant or contractor, it’s actually going to be harder for you if you’re not an independent business. The best thing you can do for your career is to set one up now.
How To Set Up Your Business
Many find the idea of registering themselves as a business daunting. Follow the steps below to make it easy There are only three critical steps to setting up your company, all of which can be done in an afternoon:
1. Register A Business Entity
There are few ways to do this, but the best way to register a small business is to use LegalZoom.
LegalZoom is a service that provides legal services online at a low cost. To set up your company, simply go to their website and under “Business Formation” select “LLC.”
You want to set up an LLC and elect to have it taxed as an S corporation.
A Subchapter S (S Corporation) is a form of corporation that meets specific Internal Revenue Code requirements, giving a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. The corporation can pass income directly to shareholders and avoid the double taxation that is inherent with the dividends of public companies, while still enjoying the advantages of the corporate structure.
2. Open A Business Bank Account
You want to keep your business banking activity separate from your personal financial activity. In order to register a bank account for your business, you need your company to have a Federal Tax Identification Number. This is a 9-digit number which identifies your business to the IRS.
If you register your business through LegalZoom, you will have the option of letting them issue a Federal Tax Identification Number for you, which I’d recommend you do.
3. Get A Business Credit Card
Every independent business needs a credit card that feeds directly into their business bank account and integrates into their accounting system. Beyond that, the perks of specific credit cards can benefit your business.
After trying almost every credit card, we’ve settled on two that we prefer. We recommend the American Express Platinum card to businesses that do a lot of travelling, and the American Express Green card for those who don’t.
Aside from their rates, it’s their perks that make them so useful. For example, we get deals on flights, upgrades, and access to members’ lounges because of our Platinum card. That may not seem like a big deal, but when you fly as much as we do, it’s incredible.
If you don’t travel, the Green card is cheaper. Both cards offer protection on rental cars and other benefits that help your company.
There are other considerations to take, like handling your insurance and benefit plan, but these are the bare essential steps to getting your business off the ground.
The Future Is All About Independence
The old school view of employment is over. The 30 year job doesn’t exist anymore, the notion that it’s a company’s duty to employ the world is dying.
Instead, our future is one in which every professional is independent, responsible for their own success, free to live on their terms, and capable of achieving so much more.
Being an independent business is the best thing that can happen to you professionally, and it only takes you an afternoon to become one.