Are You Self-Employed or a Business Owner?
The IRS lists 25 types of income ranging from gambling to capital gains to cancelled debt (yes, they tax even that). But for most of us income comes from paychecks or profits; in other words employment or business.
But even if you are your own boss you aren’t necessarily a business owner. You might just be self-employed, and that can be very different from actually owning a business. As pointed out by EffortlessEnglishClub.com (and many others):
“Self-employment is basically a job… the only difference is that you no longer have a boss. You are both the boss and the employee… A business is an organization of systems. It continues to work even when you are not working or present.”
Can you walk away for a while and still be making money? If not, you probably don’t have a business yet. Why is the distinction important?
Self-Employment Vs Business
If you’re a freelancer or self-employed in some other way you have one of the same problems faced by everyone who has a job: You stop making money the moment you stop working.
The obvious example is when you’re seriously injured or too sick to work. Your income stops. But the situation can be even worse for the self-employed versus employees. An injury may entitle an employee to workman’s compensation if it happened at work, and an employee might have paid sick days.
And although job insecurity is the new normal, self-employment income is often just as insecure. It can vary widely from month -to-month or disappear entirely if you lose clients and can’t replace them quickly.
And don’t forget that employees often get paid vacations. When you’re self-employed your “paycheck” takes a vacation along with you.
A business, on the other hand, keeps making money when you’re not there. How often have you been in a sandwich shop that has only a few employees present? The owner might be at one of her other locations, or traveling, or at home. But wherever she is, the business is still operating without her being there.
Of course businesses do not start and run themselves. Hard work is usually needed upfront. Businesses do not always make a profit either, and they typically require a larger investment of capital than is needed for self-employment. That risk is perhaps the biggest drawback to starting a true business.
Where is the Real Risk?
Businesses can fail, but businessman and author Robert Kiyosaki insists that it’s riskier to be self-employed (or have a job) than to own a business. He points to the total loss of income faced when you get sick or injured. You can also have life circumstances that get in the way of making enough freelance income.
I understand the value of income that doesn’t depend on today’s work. When my wife and I were doing well with our internet publishing business we went to Ecuador for a month and came back to an even bigger income. The business had grown while we were gone. During that time we did nothing more than check email a few times weekly. That was nice.
But you may have noticed that I said “when” we were doing well. The business is mostly gone now, having dropped from six figures to four figures annually. We’re doing fine, and we made money 25 different ways last year, but nothing we tried revived our business.
So I don’t entirely agree with Kiyosaki. Jobs can be lost, but they may be easier to replace than failed businesses. And while self-employment does require continuing work, some types can be done under most circumstances. For example, if I had a broken leg or the flu I could write this post at home or even from a hospital bed.
But Kyosaki is mostly right; no matter how fast I make these two fingers go (yes, that’s how I type), there is a limit to what I can make freelancing — or as an employee. For my wife and me it was our business that paid off our mortgages and filled our savings accounts, not our jobs or self-employment income. So whichever route is riskier, I’m happy we started a business.
And, of course, if you want to get rich you have to consider doing something other than being an employee or self-employed. So let’s look at…
Transitioning From Self-Employed to Business Owner
Many self-employment situations are difficult to make into true businesses. For example, freelance work as a search engine evaluator may pay decently, but there’s no easy way to turn that kind of independent contractor work into a business. So you may have to look beyond your current self-employment work for business opportunities.
On the other hand, some self-employment situations can naturally transition into a business. For example, if you work alone cleaning houses or pet sitting, you can hire help, do some marketing, and then hire another employee. At some point you may be able to step back and watch the income come in even while you’re on vacation. The key is to work on the business rather than in the business.
For freelance work that doesn’t have such an obvious transition to being a business you have to think creatively. For example, if you’re a freelance writer you could start a blog on the side and eventually hire other writers. If you’re a consultant of some type you might try organizing seminars relevant to your area of expertise, and then start bringing in other experts to do the presentations.
And not all businesses have to be financially risky. There are many businesses that can be started for under $100.
So maybe it’s time to transition from self-employment to owning a business.
Your Thoughts: Are you self-employed or a business owner? Which do you want to be?
Photo Credit: BI Watercooler on Flickr.com