Planning your adventure

I made an introductory video about getting into your own business (self-employment). I mentioned that all that was required to start a business or become self employed was a Social Security number. Here, I intend to expand on the details. The simplest form of business is that of a services contractor. And, for the purposes of this discussion, let us put aside all internet-based marketing and commission/referral programs for now. Let's just focus on a simple services business that doesn't require much to get started.

First, what do I mean by a contractor? That word usually conjures up pictures of guys wearing hard-hats and carrying hammers and power drills. However, in this article's context, when I say "CONTRACTOR", I mean it in the employee classification sense. The IRS defines a contractor as. You are an independent contractor if you perform services that cannot be controlled by an employer (what will be done and how it will be done). This usually means, the entity paying doesn't provide the tools, the schedule, the vehicle, or the environment. Also, they usually don't tell you the exact process. They're generally only interested in the finished product. Moreover, you would not be receiving any of the benefits offered to employees (health insurance, paid holidays).

All types of businesses use contractors - nurses, drivers, administrative assistants, teachers, and almost every type of building trade. You don't need to be in the construction trade to be a contractor! Here's a real-world example. Suppose you work for a cabinet installation company. You're an employee who gets a regular pay check. You have a boss who expects you to be at work (or the job site) every morning at some specified time. There is usually some person who oversees the job for quality and budget control reasons. There may even be someone telling you very specifically how the job is to be done. And, you personally, are not involved in the financial, scheduling, or logistical details of the process. However, over time you you begin to realize that you like your trade well enough, but you feel as though the company you're working-for is limiting your possibilities. Maybe you think you could make more money, work on better installations or in nicer homes. Maybe you want more control over your work schedule. Whatever your reason are, You can decide to become a contractor and offer your services as a tradesman to other cabinet installation companies.

How to become a CONTRACTOR

NOW LISTEN CLOSELY... BEFORE.... YOU ... QUIT YOUR JOB... You need to research the market. Going back to our example of the cabinet installer, you should discreetly and quietly contact other businesses who do the same trade. This can be a tricky process because these will be your boss's competitors. And, your boss might not like the idea of you speaking with his competition.

When you call, avoid saying "I'm calling about a job" or "I'm looking for work". This will get you nowhere because they will think you're a job applicant. Instead, ask to speak with the job foreman (or owner or crew manager) about "contracting". This will usually get your phone call through to the right person. The reason this works is that just about any business manager is open to knowing about contractors they can use when things get too busy for their regular staff. And, in some cases, it's actually more profitable to use a contractor than an employee.

Now, I'm not just making this up. This is actually what I've done on more than one occasion when I was transitioning from a regular employment job to self-employment. I just got out the phone book and looked up companies that were in my trade (Networking and Telecom).

PLEASE.... If at all possible, you shouldn't quit your current job abruptly before you start building your own business (I know sometimes you just can't wait and I've actually done that. I'll talk about the pros/cons of that later). Try to hang in there with your current job until you get a plan and have made some of those phone calls.

If after you've done some research, you think there is enough demand out there for your services as a contractor. Then all that is required to get started is that you provide your new customers with a form W-9. It's an a very easy form to fill-out. Usually, your customer are very aware of this form and will ask you first.

Before you quit your job, consider going to your boss and explaining what your'e about to do and ask him if he's open to using you as a contractor as well. You might think this is a wasted effort, but if you're a good enough asset to the company, he or she may want to keep you as a resource. This has actually happened to me in the past, too. I've left employment jobs but continued to do work occasionally for my old boss as a contractor.

Once you've left your job and begin working as a contractor for these other companies (your customers) you need to realize that with this new freedom of self employment, comes some big responsibilities and a few harsh realities. We'll talk about that in another post.

In either case, that's it - you're in business!

How much to charge?

This has always been a tricky topic. The rule I use is to take what you would make as an employee and double it. So, if you're being paid $18 per hour as an employee, then your contracting rate would be $35. However, this number can vary wildly depending on the economic conditions. For example back in the late 1990's, the economy was so hot that contractors were getting double or triple their normal contracting rate because demand was so high!

Charging $35/hr for a job you used to do for $18/hr might sound outrageous to you. But, from a business perspective this actually makes a lot of sense. Think about this.... If I hire you as a contractor there are several things I don't have to pay for anymore - sick time, vehicle, health insurance, non-productive time.

When you're just starting out, it might make you feel more comfortable to start with a lower rate just to get some work right away. So, maybe in our example you could stat with $27/hr. Careful though, going too cheap can make it seem as though you might not be that good of a tradesman. Or, a sign of desperation.

Don't be afraid to ask for what you're worth. Also, it's easier to start high and come down. And, much harder to raise rates later.

Insurance

Depending on the trade, some companies will have business liability insurance policies to cover their contractors and others may not. If the customer requires you have insurance, that's not a hard process either. It's generally about $450-$1000 a year - depending on the nature of the business. And, you usually get to pay for it in installments. Do an internet search on "General Business Liability Insurance" to find an agent. Geico has a division just for this type of insurance called Hiscox Insurance.   There are more details that will need to be addressed once you get going. But, I will save them for another blog post.

One more thing before I go...

A Delicate Ecosystem

I've been doing this style of business for over 20 years (but not consecutively). A services contracting business tends to do well when the economy is either stable or growing. However, during periods of economic contraction, my customers will decrease the amount of work they send my way because they either don't have it or what little work they do have, they're giving to their regular employees. This is completely normal and just a reality of being self-employed. In the event your work slows down too much, you need to be prepared to adapt and do whatever it takes to survive the down-turn. This might even mean going back to being an employee somewhere. You don't have to shut down your business - just put it in hibernation for a while.   Self employment is a wonderful lifestyle, but it comes with some very grown-up realities - all of which can be dealt with. You just need to learn the ropes. (that' why I'm here!) I will be covering all these topics.