The first thing you’ll want to do is have a clear idea about the type of company you want to start. I did this by spending months chatting with a friend about this very topic. There were a few things I really wanted: no employees (nothing short of partners), being able to work on a wide-range of projects (I, and those I choose to work with, have a broad spectrum of skills, abilities, and interests — working on a logo one day and writing code the next was the dream), having a set of values that drives my work and getting to work with some really talented people along the way.
With the basic concept nailed down (and I’m happy to go into way more detail on my philosophies) we began working on a name. Eventually, “Guerilla Labs” rose to the top — it sounded cool, had some fantastic visual elements that we could play with and the meaning made a lot of sense. After a search through the US Trademark Database and looking up the business name availability in Tennessee (where I live), the name stuck. When naming your own company, be careful with names that have multiple acceptable spellings (I went with a single “r” because it looked better in a logo), names that sound like another word (Gorilla, in my case) and names that you may need to spell for someone. Sigh. I’m still happy, but come on.
So far, this is familiar territory for any designer. To take the next step, I would have to get into some things that I had no clue about. My advice to you: get a good accountant. You’re going to need one anyway, and they’ll be able to advise you on all the things that need to be done to set up your business properly.
After speaking with my accountant, I decided to setup Guerilla Labs as an LLC. You can run a single-member company under your social security number, but being an LLC gives me some financial protections if anything ever goes unexpectedly sideways. In Tennessee, an LLC costs a bit over $300 per year, and that seemed reasonable to me.
I obtained a federal employer ID number (this is what’s used instead of your social security number for tax purposes) and filled out the appropriate forms to establish the LLC in Tennessee (my accountant showed me everything I needed). At this point, I’d recommend also checking to see what municipal business licenses you may need – I also needed a business license through my county of residence (since I work out of my house). My local County Clerk’s Office was able to point me in the right direction.
Ok, so I just described all the legal stuff, but there was actually some planning I did before setting up the LLC and getting a business license. Lots and lots of planning.
I’m naturally a very cautious person. I don’t take risks. I play it safe. So, going out on my own was even more daunting than it might be for someone else.
To plan effectively for your business, you’ll first want to get a solid personal budget in place. You really need to know a couple of numbers – what you “have to” make and what you would “like to” make. For me, my “like to” was about the same as I was making at my corporate job, but my “have to” was about half that amount (if we tightened our belts, didn’t set aside for big vacations and cut out extraneous spending). If you’re married, please, please make sure you and your spouse agree to these numbers – they will share in the sacrifice portion of this as much as you will.
With my numbers in place, I started to work backward.
A big thing for me in this endeavor was working “regular” hours. But, wait, not all of my hours are billable – I have to write emails, create proposals, take care of taxes, make sure my books are balanced, pay subcontractors and on and on. And, I want time to work on “non-client” creative projects – things that may lead to more work in the future. After (ideally) setting aside Fridays for non-client work, and taking out a couple of hours a day for administrative work, I was left with 24 hours of potential billable time each week. In practice, I sometimes have more time than that, and I don’t get to spend my Fridays as I would prefer many weeks, but it gave me a baseline to run some numbers against. Also, I fully planned on taking time off with my family – hoping for about 4 or 5 weeks total each year.
Alright, so 48 working weeks each year times 24 hours, gives me 1,152 hours a year (or 96 hours a month).
But, I don’t get to keep all the money I make! Taxes are tricky. Being self-employed, I’m now responsible for a larger portion of my taxes than I was before, but I also have more deductions I can claim. Being the cautious type, and not knowing exactly how much I would be hit with taxes, I decided to set aside 40% of all my income for taxes. After that, I decided to take 10% of what remained to set aside for charity (I want Guerilla Labs to be a giving company) and 2.5% for “operations” (paying for Creative Cloud, Github and a few other things). That leaves a little over 50% of my income for me.
After looking at my “have to” and “like to” numbers, I decided my hourly rate should be $100. That gets me right at my “like to” number if I have a full docket of clients paying my full rate (but my time isn’t always full and my estimates aren’t always as accurate as I would like and not every situation warrants my ideal rate).
I then took that number to a handful of trusted people – a couple of whom I had worked for in the past. And, guess what, not one of them balked at the amount. With my experience no one found it to be unreasonable. My prior place of employment also worked with a lot of contract developers – all of which were paid from $150 to $250 an hour.
So, I knew my numbers were feasible, the company was viable and I was ready to take the next step.
Those of you doing the math as we go will know that $9,600 is what I would bring in each month if all my “billable” hours were accounted for, but I knew I wouldn’t get that out of the gate. Former freelancers also warned me about the “feast or famine” nature of this work. This told me that I needed to set some goals for myself.
The first goal was really a check on the continuing viability of the company. I was going to give myself three months to be making the minimum of what I needed, and if I wasn’t there then it would be time to start looking for another job. For me – and this is where I become really transparent – that amount was about $4,400 in revenue (to pay myself $2,200).
The second goal was to have a year’s salary in the bank. The thought behind this is that if I could build up that much money then I could smooth out the “feast or famine” periods. Ultimately, my plan is to live off of the revenue I generated in the previous year. So, let’s say I make (after taxes, operations and charity) $60,000 in 2015. That means I can pay myself $5000 each month in 2016 – regardless of what that month’s work looks like. I knew being able to know my family budget, and make things consistent, would take loads of stress off my shoulders. Ideally, I wanted to get to this point within 24 months of launching Guerilla Labs. It should also be noted that I planned to not pay myself anything for the first couple of months to allow myself to start getting ahead with what was in the bank verses what I needed to take home.
Third, knowing how hard I can be on myself, I created a revenue goals chart. This chart started my revenue goal at $3,000 for my first month in business, stepping that up to $4,400 by month three and proceeding upward to $9,600 by around month nineteen. This was useful when I had a slower month – like I did last summer – to look at the chart and be able to say, “I’m doing fine, I’m right on schedule”.
I’ll go into detail with how my financials turned out a little later, but I think it’s important to state right now how some of these goals worked out.
I easily met my first goal with the initial clients (see the next chapter) I lined up, which I think should be obvious since I’m writing this post after a year and a half.
The second goal has been a little more fluid. While I’m going to be really close to being a year ahead by about 27 months, my take home will probably about $3,500 each month instead of $5,000 (my “like to” amount) each month. I also attempted to spend a lot longer at my minimum amount ($2,200) than I probably should have (in an attempt to meet this goal sooner), and life happened instead – washing machines broke, kitchen cabinets needed to be fixed and I got a little discouraged. So, I’m slowing things down just a little bit on this front to give my family a little more breathing room. I feel great about where we are now, but I state this just because I think it’s important to be reasonable with your goals and how you approach them. It’s very possible to put stress and pressure on yourself that just isn’t warranted.
And the revenue goals chart has, while encouraging me in many ways, been completely irrelevant. I made well over $9600 in just my third month of operations and I’ve had months since where I have brought in no money at all. The pay cycle and cash flow issues inherent in this type of work make things really interesting. Really, instead of looking at a month you have to step back and look at the trends. A really big month for me almost always means the next month is low (just because payments were all stacked up at the same time). So, it’s helpful to keep an eye on the overall trend, but to not get too caught up in a single month’s results – either good or bad. The number that I’ve found to be most useful to me is the “money in the bank” metric. As long as that amount is going up, I know I’m in good shape, but even it can be misleading because I know there is a big check going to the IRS each quarter.
Continue A Field Guide to Self Employment with chapter 3: It’s Dangerous to Go Alone.