I made the leap from freelancer to business owner in 2019 after I noticed I wasn’t quite operating as a typical freelancer but more as a mix between the two. It made me think about what the differences are and how it would affect my business and life if I operated more formally as a business and not as a freelancer. After tweaking my business over the span of several months, I made a shift towards positioning my business, Midstride Technologies, as a web development company instead of freelancer.
If you are a freelancer, you may be wondering what exactly is a freelancer? Are there any real differences between being a freelancer or business owner? In this post I’ll go into detail explaining the differences, pros/cons, and how to use 2nd Order Thinking to make your own decision.
As a preface, I transitioned from being fully employed to freelancer a few years ago and wrote a post about that here.
What is the difference between a freelancer and small business owner?
While there is no official definition of what differentiates a freelancer from a business owner, I find this description of a freelancer quite accurate.
A freelancer works solo as a contractor for clients that pay her by the hour or by the project. A freelancer’s goal is to fill only her own available time, securing jobs that pay well and are a dependable source of work. In many cases, freelancers don’t need a business license or any formal registration with the government to operate.Lending Tree
A freelancer by this definition aims to fill their own hours and typically works on shorter projects. If the company utilizes your services for a long period, over a year and essentially asks for all of your time, you are basically a full time contractor for that company and not really a freelancer anymore.
So freelancers will typically gravitate towards work that is shorter, ideally recurring, and allows you to work with other clients on flexible schedules. Another common characteristic of freelancers is that they can work from anywhere, they often do not have a business office or need to see their clients in person. These days with COVID this is not a big differentiator given a lot of the world is working from home.
A small business owner (SBO) on the other hand can work as a contractor for a company but their business should first be incorporated or have a formal business license. Aside from this technical difference, a SBO focuses on running the business and will bring on subcontractors or employees to deliver on projects. The focus of the SBO is to find ways of generating stable revenue, finding contracts, and hiring the right people. Being a small business, a SBO normally wears many hats doing Business Development, Marketing, and in my profession web development. Sometimes these roles can be contracted out as well but the key thing is that as an owner you are managing all of the operations. As well, instead of trying to max out hours it’s more about profitability. Often times it’s best to aim for 80% utilization instead of 110%, so you have room to wiggle and manage more new work.
What are the pros of being a business owner over freelancer?
Ability to Scale Up
You can hire people to do the work you normally do as a freelancer which allows your business to scale up and take on more work. This can be quite exciting when you first begin to do this. When you find the right people to help and manage, and the client is happy, everything feels right. In addition, instead of saying “no” to more work, or giving very long time horizons, you can usually take on more work than you would as a freelancer.
Increasing Revenue & Profit
Because you’re taking on more clients, you’ll be making more money which is always exciting. If you’re smart about how you manage your expenses, you should be able to make more profit as well. Typically, in my industry of web services you would make the difference on your company rate and the pay out to your contractors by the hour. There are many ways of doing this, but that’s the most straight forward. As a freelancer, the only way you can usually increase your profit margins is by increasing your rate, lowering your expenses, or providing and selling more value on a fixed rate project.
With a team at hand, whether it’s employees or subcontractors, you can also offer a more diverse range of services. For example, for my company Midstride Technologies, I offer full stack web development services and hosting as my primary offering, but I am able to manage design & copy work for clients as needed. I position these as secondary offerings, where if the clients prefers that I handle it all I can do that. As a freelancer, I would be offering referrals instead.
Sales and Closing
This depends on your referrals and leads, but presenting your business as an established business can improve your ability to bring in sales and close in on leads. Your primary activity with sales is to build trust and prove you can do the work. When you are a freelancer if your lead doesn’t know you that well, you’ll spend a fair amount of time building that trust.
When you operate a digital business, it’s often the case you won’t have a physical store, and even if you do often times your clients are not within your city because digital services are not limited by geography. As a result, anything you can do to establish more trust, such as incorporating your business and making it known you’re here for the long haul, will help establish trust and land jobs.
When you are a business, you open up the doors to bigger projects. Freelancers often get the lower end of the market because they’re perceived as cheaper. Even if you have 10x more experience than the employees doing the work from a company, it’s harder to sell a client on a rate of $200/hour as a freelancer than it is for a company to charge $200/hour. It’s all perception but that is the game of sales.
If you are good at running your business and hire the right people, you can often have less stress. Your good people are doing the work, and you can focus on high level issues. When customers are getting the value they expect (and more), and your team are being paid on time (maybe with a bonus), life is good. Keep in mind this can go the other way quite easily, which I will explain in the “cons” section.
What are the cons of being a business owner?
It’s not all sunshine and roses when running a business, otherwise all freelancers would be becoming business owners. Here are some of the cons and reasons not to make the leap.
More Managing and Less Craft
This is probably the biggest deterrent for freelancers. As a business owner you spend more time managing, talking, looking at financials than actually doing what you were originally trained to do. More importantly, if you don’t enjoy this and prefer just doing your craft then you shouldn’t take the leap. The most important thing, aside from being able to make a living, is that you enjoy what you do.
Running a business and managing bigger work is naturally going to create more expectations and potential for stress. You’ll have longer engagements which means you can’t always take that 3 month hiatus that you can as a freelancer. As well, you’ll probably have contractors or employees to pay. If it’s contractors, you’ll often need to pay amounts which can be quite high. If you have employees, it will be a more predictable amount but you’ll always be thinking about your burn rate and how long your business can last.
Long Haul Commitment
Clients that hire a business expect you to be around for many years, I know that’s what I expect when I hire a lawyer, accountant or anyone in a professional service. This can be a potential con if you’re not really committed to what you’re doing or unsure. If that’s the case, stick to being a freelancer as you really want to avoid a situation where you have to drop a client. Not only is it painful for the clients, you hurt your reputation immensely and this is what your business relies on for growth.
Liabilities & Insurance
As a business, you run bigger projects, have people working for you and as a result more liabilities. You should get insurance, which is another cost and expense but it’s definitely important to have this. As well, many clients will require some form of insurance.
Pricing Your Business Out Of Your Market
If you start charging more because you have more overhead you might become too expensive for your existing client base. This depends on how you structure your business. My goal with my business was not to increase my rate by keeping my overhead low. A key value proposition for my business is that I provide an affordable rate with the assurance of a formal business. Or put in another way, Midstride delivers the value of a web development shop without the overhead.
Use Second Order Thinking to Decide
How do you make the decision on whether making the leap is worth it? You can go through the pros and cons, add them up and see which is higher but I’ve found that never helps me. The problem is that this approach looks at everything at the present moment. In reality, these big decisions impact your life over time and it’s the longer term you should be thinking about here.
After reading James Clear’s book “Atomic Habits”, and buying the actual Atomic Habits log book, I adopted the framework of “Second Order Thinking”.
I can’t claim to be an expert on the method, but a simple implementation of it is the 10-10-10 method.
In short, think about how you would feel about making the decision of becoming a small business owner 10 minutes from now, 10 months from now, and 10 years from now. But let’s change the actual metrics of 10 minutes, 10 months, 10 years to 3 months, 1 year, and 3 years. You can pick any time horizon you like, as long as you focus on short term, intermediate and long term.
For example, the 3 months could be:
- – More expensive
- – Less time to do other things now that I’m converting into a business
- – Cash flow is less!
- – I need to learn how to hire and fire.
- + Feel more confident in sales now that I’m running an official “business”
- + Existing clients are pleased
- + I can say yes to more work!
Then do the same for 1 year
- + more time because I have contractors who are helping me
- + more revenue
- + more people to bounce ideas off and socialize with.
- – more expenses (accountant)
- – more stress and less time do to the work I really enjoy
and then 3 years
- + making 3x what I made as freelancer
- + Opportunites to partner with other companies are opening up
- – I miss those 3 month trips where I could disappear
- – My contractors keep leaving
- – I need to hire an employee and benefits are expensive!
It’s hard to really predict everything, but it’s within reason to predict a few scenarios. The important part of this exercise is that you may notice a big discrepancy between your short and long term assumptions. It may be that a lot of the negatives are just short term pain.
Below is an example I created using whimsical.com
These examples above are just to demonstrate how to visualize it. A little pain for more gain is when you should seriously consider doing it. On the other hand, if the benefits don’t seem to make sense for you, then you have your answer!
For me personally, I was tired of saying no to more work, and wanted to take on bigger projects with more authority. While I still enjoy being a developer who is a cog in the machine, which is something I still do, I equally love managing projects and hiring.
How to make the leap?
So let’s say you’ve decided to make the leap and formally become a business or at least position yourself as a business. How do you do it?
I will follow up this post with another one which provides some actual tips to converting to a business. Whether it’s registering a business or tweaking your marketing and positioning, there are subtle tweaks you’ll want to make.