M is for Money

In business it takes money to make money. My peers who have gone out on their own are making two to three times what I make, but they don’t get to keep all of it. As a business owner there are many additional costs, fees and taxes that you don’t pay as an employee working for someone else. For me to analyze the benefits of becoming a business, Miss M and Company, I have to weigh these extra costs and headaches against the increased income.

Start Up Costs

The cost to start a business varies dramatically depending on what it is you plan to do – opening a retail store has little in common with becoming an independent consultant. One requires little upfront capital while the other will drain money for months as you prep for opening day and wait for profitability. But even consulting has its costs. You will typically need a business license and to pay any registration fees, along with obtaining business insurance – liability and maybe even worker’s comp. Some areas are known for piling on the fees for businesses. You will also need to advertise your business, create business cards and build a website. Most of these costs will come from your pocket before you receive a paycheck.

The Costs Continue

There are many financial differences between being an employee and an employer. The full cost of health insurance and other benefits is now your responsibility, your employer usually pays a large portion of your compensation in benefits. You also have to pay the full share of the Social Security Tax, as an employee you only cover half and your employer chips in the other half. Then in cities like Los Angeles your business will be subject to a separate local tax that individuals don’t have to pay. It’s important to understand and prepare for these costs as part of planning your business.

Reality Check

I was approached last week about working on another project where I would have the opportunity to become my own business. But of course I have my concerns about being a small business owner. Friday I lunched with one of my co-workers who happens to work for himself to get some idea of the costs I would encounter. He was able to give me a path forward to get myself off the ground and some idea of how the business works. I’ll pick the brains of the other guys at work, but they are little – less ethical. They are who I don’t want to become. So I used the numbers from Friday’s lunch and did a reality check – would working for myself pay off financially? It seems like I would, take home pay would be at least 50% better. The scenario included slightly more retirement savings than I current get, without the restrictions of my company ESOP. I tried to overestimate the costs I know about, assuming there will be additional ones I don’t know about yet. Of course this potential job could fall through, so I’m trying to be careful. I have to keep the job I have for now, while quietly exploring setting up shop on my own.


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