To Be or Not To Be Self-Employed
COW Library : Business & Marketing : Nick Griffin : To Be or Not To Be Self-Employed
At some point, many of us in the "creative" sector are faced with that most vexing of questions: to be or not to be... in business for yourself. Whether tis nobler... (Alright. I'll set the lame Shakespearean puns aside and get to the point.) How do you decide that you'd be better off working for yourself than you would be working for someone else?
Early on let me say that this discussion is based on starting a business in the United States - one of the least complicated, most pro-business places in the world. Hopefully much of what's to be discussed here will be applicable elsewhere. If anything, those approaching this decision in a heavily regulated environment (are you listening Western Europe?) will take into account the additional burdens imposed by their own governmental entities.
Also, as long as I'm offering caveats for this article, admittedly my experience, and the perspective of this piece is from that of a very small business. So if your goal lies in starting a company that grows to the size of General Motors, you're going to need someone much smarter than me (Duh!) to help you get started.
BEING YOUR OWN BOSS
So let's get into it, what's so compelling about being your own boss? Well, for one you won't have to answer to that moron who keeps telling you what to do. That assumes, of course, that you weren't planning on having any clients who will be telling you what to do. Yes this is a silly exaggeration, but the point is if you're not independently wealthy, you're always working for someone else. To take the positive side in this, when you're in business you usually have more than one client, so any one boss only has a percentage of you and losing one who represents 30% of your business is more survivable than losing 100% of your job.
Another compelling reason for considering self-employment is that you're like me and have a personality type that's incompatible with corporate dictums and structures (especially the first part). In other words, selfemployment seems like a good idea because you're not fit for standard employment. In thinking about this I have to admit that this fits more of the small business owners that I know than not.
One of the most common reasons for wanting to be your own boss is the creation of an environment where you are the one setting your work priorities. Say, deciding that taking a few unbillable hours to make a project really sparkle for the demo reel is a choice you might want to make versus the choice of your employer who deems it a better use of your down time to re-catalog the stock music library. While the upside in this example is obvious, the down side to setting your own priorities is that sometimes you'll make the wrong choices and you'll have to live with the consequences. As in not being able to quickly locate the best music choices.
THE "NEVER AT HOME" BRAIN
Being your own boss often means that while your body may go home at night, many times your brain stays at work. One of my early mentors described this as the "3:00 AM Show," with nights spent staring at the bedroom ceiling trying to figure out the business things that are keeping you awake. Oh, and by the way, the more clients you have and especially the more employees you have, the longer and more intense the "3:00 AM Show" can be.
The decision to become selfemployed should be based on logic, not emotion. Logic: "I've got six clients who will each give me a major project in the next three months for which I'll be able to bill $XX,000 against expenses of $YY,000." More logic tempered with reality: "Some percentage of these six major projects won't come together in the planned three month period." Even more cold logic: "If I underestimate or just get unlucky I may have times where expenses exceed income and I'll have to cover the difference." So logically you can figure out that you better start with $ZZZ,000 to cover the time that it takes $XX,000 to come into line with $YY,000.
Emotion? You can't remove it from the process. Most of us who start our own businesses do so because there's a voice in the back of our heads saying, "I really love the nuts and bolts of this kind of work - be it shooting, editing, effects, etc. And because I love it so much, I know that's why I'll be successful." There's a lot to be said for this passion. For one, passion is what separates artists from technicians. Passion is why you get up early, stay late and put in time on the weekends. If you don't have the passion and the emotion you probably would never make the effort to start a business in the first place. And maybe your business wouldn't last long anyway because that's what enables you to work hard enough to beat the odds and succeed where many others will fail. Hey, this is one of the points found here in this issue of the COW Magazine, isn't it?
Speaking of which, if you go strictly by the odds, they're stacked against you. Most start-up businesses fail because, as discussed earlier in the $XX,000 and $YY,000 example, their management never takes into account what ongoing operations will really cost and how slowly business will build to the point where those expenses will be met. Sounds really simple, and stupifyingly obvious, but this is, in essence, the primary cause of new business failure.
THE DECK IS STACKED
I'm not going to take a lot of space discussing this, but the rate of failure among small business startups is sobering and has to be one of the considerations weighed in your personal "to be or not to be" equation. One study I found from a 2004 US Dept of Labor's Bureau of Labor Statistics stated that within the category of "Professional and Business Services" - the category into which we fall - the rate of first-year failure is under 18%. That's almost comforting until you consider that in addition to volatile creative-based businesses like ad agencies and production companies, this broad category includes entities like start-up law firms, accounting firms, architects, computer consultants and so on. Take this broad category out five years and the failure rate is nearly 56%. Do you think 56% of law firms and accountants fail? I don't. Sober yet?
And because sobriety is one of our goals in this discussion, just what does "failure" actually mean? Not to put too harsh a light on it, but in case you haven't thought too carefully about this, failure almost always means losing your initial investment. Gone. Kaput. Money no longer yours. It can also be losing whatever investment you were able to extract from friends and family. Often it means losing whatever assets you pledged to a lender - in the most severe case, say losing the equity in your house because the bank made you sign a "personal guarantee" that stated that if the business didn't pay them back, your assets would. So to summarize, "failure" means you could, at least for a period of time, be jobless, homeless and have many of the people closest to you ticked off that you've lost their money, too. Okay. Back to the positives.
THE "RARELY AT HOME" BODY
Here's something commonly heard: being the boss means you won't have to work as hard and as long. Hah! This is probably one of the biggest misconceptions of those who've never started a business and of those who did but failed in the businesses' earliest days.
For the first several years being the boss means you're the one unlocking the door in the early morning, locking it at night and coming in on weekends just to get to the things that there wasn't time to do during the week - like recataloging the stock music library.
What are some of the other advantages of being the boss of a start-up? How about getting to be the guy who takes out the trash, sweeps the floors as well as files the tax paperwork? Let's face it, businesses don't run themselves, even creative micro-businesses. And running a business legally and profitably - and the two are intertwined - involves a myriad of mundane details. As an employee you're probably not aware of things like monthly payroll withholdings, quarterly unemployment insurance payments, annual assessments on the physical property (gear) the business is depreciating, and so on, and so on, and so on.
There are a whole host of constant operational details that an employer must do as part of keeping the doors open. And now those jobs are yours, boss.
Let me offer a personal example of both sides of this. Years ago, I asked a friend to join me as a minority partner. He was, and is to this day, massively creative. We both saw gold spewing forth from the ideas this man would bring to our small business.
What never occurred to either of us at the time was that he had spent his entire career working for much larger companies and that his entire approach to work was based on this kind of structure. He had always had a depth of resources at his command and there had always been someone to "handle the details." The long and short of it was I was now the "someone" and my friend was unprepared to do anything beyond generating initial concepts.
In my mind I was doing 90% of the work and if he was only comfortable with the 10%, which approximated the way he had worked everywhere else, we had a lousy ratio of work to ownership equity. I bought back his shares. He went back to the world of having other people "handle the details" and, after a number of years of calming down, we eventually started speaking again.
Who was right and who was wrong? Both of us were right and both of us were wrong - tragically wrong. He didn't understand how the co-owner of a small business operates and I didn't know that it wasn't obvious and automatic for a co-owner to know he has to address all areas of operations.
RECEIPTS VS NET EARNINGS
Let's give some attention to the difference between gross receipts and net earnings. Just because you receive a $10,000 project payment from a client doesn't mean you've got $10,000 to give yourself or otherwise spend. Yea, I know this too sounds really obvious and basic, but not remembering it can be quite inconvenient when the bills come due.
So how much of the $10k is yours? Let's assume that you're not using any of it to pay for things like new equipment, or make payments against a loan for past purchases. Let's assume that you've already set aside money for rent, utilities, automobile expenses, all of the varieties of insurance you need to maintain, etc. Let's assume that you don't have anything or anyone else that demands a portion of this money. (Big assumption, but let's just go with it.) If you want to be safe you'd better set aside 35 to 40% of the $10k so you won't have to scramble when federal, state and local taxes come due. "Oh, well, that's not so bad," you say? Remember all the stuff earlier that we assumed was otherwise taken care of?
Let's get some perspective on the reasons to not go into business for yourself. (As if all of the stuff up to this point had been a glowingly upbeat endorsement of self-employment.) Sometimes you can make more working for someone else. For many creative professionals, especially those with a highly focused skill set / area of specialization, oftentimes it's best to take the simplest path to self-employment, that of an independent sub-contractor. It's what many of us refer to as a "1099 employee," named after the IRS tax form, which is provided the subcontractor at the end of the year documenting taxable income.
In most jobs you either have a "buffer" or you are somebody else's "buffer." One of the best parts of working in a large company is the compartmentalization of jobs. Mostly this means not being personally responsible for every last, little detail of everything. And it can also mean, as the creator, not being on the front lines of client/ customer contact. Call it an account executive or producer or simply what it is, a "buffer." There's a lot to be said for not having to be the one sitting in a meeting listening to a seemingly endless stream of suggested "improvements" for your project. When you're selfemployed, more often than not, you don't have a buffer and you have to learn how to grin and bear criticism of your work product. "Why yes, Mr. Client. I think your wife's idea of fade to orange instead of fade to black is certainly worth taking into consideration."
TESTING THE WATERS
Nobody ever said that the choice of going into business has to be an in or out, either/or proposition. In other words, you don't have to go 100% of the way all at once. In fact, it's an extremely good idea to get started and test the waters while keeping the income and security of your day job. Then you can get a reasonable picture of how many clients you can attract and what they'll actually spend with you. This however can lead to ethical conflicts, scheduling issues and thorny problems. Like clients who insist on being there for a session but are unwilling to sit with you in your spare bedroom editing-suite after 8:00 o'clock at night. But, hey! At least you'll be in business for yourself.
Well, that's all we have space for now. I hope this gave you a few things to think about. This topic is one that can, and hopefully will be discussed in much greater depth on the COW's Business forum. Sorry but I gotta go now. The stock music library isn't going to re-catalog itself.
Nick Griffin is the founder of Griffin Communications Inc., in Towson, Maryland. The company specializes in corporate communications, video and advertising. His clients span in size from small industrial companies to large, multi-national manufacturers. Nick is also the founding leader of Creative Cow's Business Procedures & Marketing forum, as well as senior business advisor to CreativeCow.net.
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