The following post originally appeared in Human Infrastructure Magazine, a Packet Pushers newsletter on life in IT. You can get a free subscription to Human Infrastructure by signing up here.
In Human Infrastructure 25, I wrote about the challenges of working for yourself. Let’s take this a step further. What if your goal is not merely self-employment, but starting a business?
Starting a business is all the rage these days, as pundits proclaim the importance of “pursuing your passion” and similar poppycock. Note that the folks recommending we all get out there and do our thing are already ridiculously successful.
In that context, listen, for example, to Tim Ferriss’s podcast and those he interviews, but keep a healthy grip on reality before you take the plunge. The reality of running a business is far from the dreams scribbled on napkins in Silicon Valley bars.
Let’s consider a few of those realities.
1. You have all the same problems of self-employment, but more.
Running a business that employs or contracts other people implies that you’ve got more work than you alone can handle. Administration, job tracking, and accounting requirements scale linearly with the number of projects your business takes on. Who will do that work? Hint: not you, my technical friend. You’re not good at it, and it’s not billable time.
2. You have to coordinate more that just you.
When self-employed, you have one person to worry about — yourself. And, as a grown adult, you likely have a reasonable command of your calendar, workload, project timing, and so on.
As a business owner, you not only have to coordinate your own activities, you have to be sure that the folks you’ve added to the team are ready to go as well. Even if you hire competent self-starters, you will have to constantly weigh whether the work everyone is doing is the right sort of work.
Being busy is easy. Being busy about the right things is hard, and as the business owner, it’s up to you to steer the ship for everyone.
3. Contractors require annual 1099s.
In the US, you must submit a 1099 form for anyone you’ve paid more than some small cutoff value (I believe $600 in a tax year). That goes to the government, and it goes to the contractor. This isn’t hard to deal with, but it’s one more thing you are obligated to track.
4. If you have full-time employees, you will need help with legal requirements.
Consider payroll administration, including related taxes, as well as benefits administration. If you think you can do this yourself while also contributing to the bottom line of your business, forget about it. You can’t.
Remember that companies of size have entire accounting and human resources departments. Even if you just have one or two employees, you’ll have to outsource these functions to providers.
5. You will need a lawyer and a tax accountant.
Why will you need the services of these professionals? Because operating a business with owners, employees, an operating agreement, etc., is a twisty road through a live minefield. If you miss an unexpected turn and go off the road, a mine blows up.
Lawyers help you understand the ramifications of your business’ organizational decisions, and will be necessary when considering serious changes or contractual agreements. Tax accountants help you compute your tax obligations and file as a business owner.
If you operate in multiple US states or have employees in multiple states, taxation becomes impossible to understand for the amateur, as you will likely have federal, multi-state, and local obligations — at least filing obligations, if not financial ones.
6. Cash flow is lumpy, but payroll isn’t.
As a self-employed person, you learn to deal with the cash being flush one month, but light the next. Companies pay when they pay, typically from 30 to 90 days, and you just roll with it. As a business owner with a payroll, this lumpy cash flow places pressure on you. Payroll is a recurring expense that doesn’t care if Super Big Company with no respect for your net 30 terms hasn’t paid its enormous bill yet.
Doing business in America is more difficult than being self-employed in America, which is hard enough. Over the years, many of my friends have taken the plunge, often with dreams of building the IT consulting organization they always dreamed of, or bringing some new product to market. Some of them have made a go of it. Most have not.
If you’re nurturing a business dream, good for you. I mean that sincerely, because I relate to exactly where you’re coming from. But before you, too, take the plunge, know what you’re getting into. Find good counsel, do your homework, and make every decision with as much knowledge of what you’re taking on as possible.