Since I posted Why I Freelance a few months ago, people have been asking me for advice on how to get started. So, this week I fulfill a promise to share some pointers.
There are probably books on this, and they’re probably better organized, but here is my experience. We start with the easy stuff:
- Form a legal entity. I have tried various forms over the years, including a Latin American SA. What I recommend for you is an LLC. This leaves you free to elect C- or S-Corp tax status later – and you don’t need a lawyer. You can form an LLC online for a few hundred dollars.
- Draft a consulting services agreement. For this, you will need a good lawyer. It is always better if you can send a prospective client your standard contract. This frames the negotiation in terms favorable to you. Pay special attention to the non-compete terms.
- Find a good accountant. If you are good at tax prep, and using a “disregarded entity,” you may be able to do the firm’s returns on your own. Otherwise, seek professional help. Pro tip: pay Uncle Sam quarterly to avoid a surprise at tax time. Canadian pro tip: keep your HST receipts in a separate account.
- Choose a tax status. The last time I was incorporated in the U.S., I used an S-Corp. This is a hassle because you have to deal with payroll tax. It was handy for me because I was able to have my wife on the payroll. The Canadian version of this is called “income splitting.”
- Set up a web site. No, don’t look at mine. It’s overdue for an update, and this here blog is my main presence online. Depending on how you plan to market yourself (see Networking Tips for Consultants) you will spend more or less money on the web site – and you may have to learn about SEO.
- Open new bank accounts, and obtain a corporate credit card. Using the corporate card is an easy way to keep your business expenses separate, and it’s a source of working capital. When I started at GMAC, it was months before I got paid, and I had accrued thousands of dollars in expenses.
- Learn how to use QuickBooks. As you can tell by now, keeping the books is a big part of running your own business. You will need to keep track of your accounts, and payroll, and 1099s, and present your clients with professional-looking (and accurate) invoices.
- Obtain health insurance. I can’t help you here. I haven’t lived in the U.S. since Obamacare took effect. I understand it’s expensive. At present, I have an international Blue Cross policy. Depending on your tax status, this is deductible on either your business or your personal return.
- Plan your budget. Figure out how much income you need to pay the bills, and then figure out how you can earn that much – after taxes – assuming you are on the beach for three months of the year. That’s a sardonic Big Six expression, “on the beach.” It does not mean happy hour in Playa Bonita.
- Identify your prospective clients, as specifically as possible, and where they’re located. Unless you have a versatile skill set and live in a high-demand area – developing software in Seattle, for instance – you will be on the road. I could write a whole ‘nother article about living on the road.
I presented the easy stuff in a short list that you can print out and check off. Now, the hard question is, why should somebody buy what you’re selling – and for how much?
As of this writing, I know that I can rent a good software developer for about a hundred dollars an hour, and down to $65 for newbies. The rental agency may keep up to 25% of that, which is not the scam it sounds like once you consider they have to do all the stuff on that list – plus find the gigs.
If you can possibly manage it, work under contract for whatever agency serves your trade – they’re ubiquitous – and learn everything you can about how they do business. Learn how they handle sales, contracts, billing, payroll, benefits, beach time, and something called “realization.”
Your situation will depend on how old you are, and where you are in life. The best way to start is with a firm, while you’re young, and before you have kids. Consulting can be demanding. If you have a family, I recommend keeping your day job, and then picking it up after the kids are grown. I know a bunch of successful “mature” consultants.
I was fortunate to start in a Big Six firm (there are four now) that taught me how to manage clients, how to sell an engagement, and how to write a statement of work. I had classroom training, role playing, one-on-one instruction, and a whole lot of hard knocks. That early experience was priceless – and I can’t distill it into a blog post, sorry.
The good news is that I was a lousy staff consultant. All of this stuff is trainable. I hope these few pointers from me will help you to make the transition. On the other hand, if you’re having second thoughts – that’s valuable too. It’s not for everybody.