Updates
How to Transition from Freelancer to Small Business
September 28, 2023
Transitioning from a freelancer to a small business can be daunting. Making sure you are ready and prepared for what lies ahead is the challenge.
First, one must determine whether the timing is right to make the transition from a freelancer to starting a small business. If so, they need to be prepared to stick it out through the challenges. But if you have the drive, you can make it happen. And we should know as we have witnessed many of our clients succeed in the transition!
Typically, a freelancer’s decision to launch a small business is based on one or more of the following factors:
- increase earnings
- grow client base
- expand knowledge and experience in the field
- increase hours
- switch careers
- turn side hustle into a formal situation
- personal fulfillment
- Take advantage of tax benefits associated with owning a business
In this series of articles, we offer advice on how to get started, how to maintain and how to thrive when making this transition.
Be Prepared
As a freelancer you have acquired the necessary skills to manage YOUR time, business development and tax affairs. However, running a business brings a lot more responsibilities to the table.
To prepare yourself and your business, start by creating systems and processes for standard procedures. Having to reinvent the wheel each time slows down work production. This will also allow you to easily delegate the task to someone else when the time comes, should you choose. It will also help ensure things run smoothly even when you are not directly involved.
Develop your system so that it clearly lays out what needs to be done, how often and who is responsible for the tasks. Focus on being able to automate, train and educate current and future employees upfront. Eventually, this will allow you to focus on the bigger picture – your vision.
By doing this, you will have more time to focus on building assets into the business that will help it grow, run more efficiently, and create more value for all invested parties.
Do Your Research
As a freelancer you already have attributes needed to be an entrepreneur. But becoming a business owner brings with it a lot more responsibilities. New obligations will include payroll, finance, leadership, hiring and firing, managing a team and marketing your brand.
Before you start your business, it is wise to do plenty of research to ensure you understand the challenges in your industry. Know your competitors and how to make your business stand out from the rest. Networking with people in your industry who have gone through this transition is a great way to begin.
There are also certain legal obligations that you did not have as a freelancer that you will need to research. You will need to know, understand, and abide by your local laws and regulations concerning the creation of a business. This will of course depend upon what corporation you wish to establish, i.e. sole proprietorship, general partnership, Limited Liability Company (LLC), etc. You will need to make sure to obtain the proper certifications and permits.
The logistics of starting a business can prove to be one of the hardest tasks to overcome. Likewise, be sure to be on top of any employment regulations you need to abide by such as minimum wage, parental leave, pension, and flexible working.
Additionally, there are many software programs available that can help you to streamline processes and simplify or automate certain tasks. These programs range from assistance with managing your accounts to human resource concerns.
Consider hiring a part-time virtual assistant (VA) to help you during your transition.
A virtual assistant can take some tasks off your plate so you can focus on more important things. The VA could perform research for you, manage your email and voicemail and send out invoices.
You may worry about how you can afford to pay a VA but with your newfound time you can strategize how you will increase revenue and grow your business.
Review All Your Options
There are options out there that you may not have even considered.
If you are making this transition because you have more work than you can handle, why not consider finding another freelancer to support you in the short-term. Arrange for them to take a certain percentage of their fees during your collaboration. This will free up some time for you to focus on developing those systems and processes for your business. It will also enable you to handle bigger projects and create more revenue.
Take it one step further and find yourself a co-founder. Obviously, this decision comes with a lot more permanency so finding the right person for the job is imperative.
A co-founder can bring many benefits to your venture like complementary skills, assistance with decision making as well as financial assistance. The dilemma with this decision is making sure to find the right person. If not, you could experience more problems than you started with along with a failing business.
Make sure whoever you choose has the same ambitions, work ethics and objectives as you. Also be sure to have a clean and concise understanding of everyone’s roles and responsibilities within the business prior to finalizing anything.
Redefine Your Offering
As a freelancer, it is most likely that you are refined in a few key areas. As you develop into a business you can expand your offering.
For instance, if you are a freelance copywriter, you could bring in content creators, designers, or search engine optimization specialists. This gives your clients the opportunity to utilize your one stop shop instead of having to hire two or more companies.
With the additional talent, you can now take on bigger and more interesting projects and command higher budgets. This is something that can also be implemented in the future and will be discussed in more detail in our next article in this series.
Get Your Finances in Order
In the beginning of your transition, be prepared to take a hit on earning while you figure things out. It will take time to build your client base; put the systems and processes you created in place all while juggling hiring and training staff.
To prepare yourself financially, we recommend that you have three months of cash reserves available at any given time. Better yet, have these reserves before you start the transition from freelancer to business.
Cash reserves are monies kept on hand to meet short-term and emergency funding needs. It can help keep things moving if you hit a rough patch during the transition.
To determine how much you should have in your reserves, review your monthly expenses. Determine an average monthly expense rate and work with that to determine how much three months of expenses would be.
Once you figure this amount out, determine the portion of your profits to direct to the reserve on a regular basis until your cash reserve goal is met. We recommend having a separate banking account for your reserves and not touching it unless you absolutely must. If you do dip into your reserve, replenish it as soon as possible.
While trying to build your cash reserves, you may want to investigate other financial solutions to assist with your goal. There are loans, financing, and line of credit options available that could help with the businesses’ cash flow while still allowing you to build your cash reserves. It is always wise to have relationships in place with your bank or lender to provide safety nets if necessary. Connect with your bankers and anyone that you would be able to get a loan from in a time in need.
Hiring an Accountant vs. Preparing Your Own Accounting
There are many resources available to assist a freelancer along this journey. These include software systems such as QuickBooks, which help businesses with their accounting processes. If this is something you think you can do and want to then go for it! Just remember to be realistic with yourself as far as knowing your limits.
Operate at the type of your licensure. If you are, for example, an artist and your finances are less than stellar already, then maybe trying to handle them yourself is not the best option. Make it easier on yourself and hire an accountant to handle your finances.
Bowers offers complete support for your business from soup to nuts. If you want to handle your accounting with limited support, we can also assist you. We offer QuickBooks set up and support tailored to your business’s needs. We can set up a schedule to check back with you periodically whether it’s quarterly or semi-annually.
Scaling from freelancer to business owner can be challenging and time consuming. Remember, this is a long-term investment that requires persistence and patience to build. Take it one step at a time and stay focused!
Check out Part 2 in our series to learn more about growing your new business.
About Bowers
Bowers aims to offer helpful information to our clients and friends. Learn more about how we can help should your business need client accounting & advisory services.
Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
