Defining your business – Entrepreneur or Freelancer

You’re just about ready to start your company, and want to know how you define yourself. The first step would definitely be to create the legal structure (LLC, S Corp, or C Corp), but what do you tell people? Are you an entrepreneur, a freelancer, someone who works from home?

The Freelancer

Any time you are selling time, you are a freelancer. By this, we mean that you need to work to earn revenues. This applies to all consultants, big or small. Even companies like the Boston Consulting Group are freelancers.

As a business owner, it’s probably the worst spot to be in, because you need to work more to earn more, but more importantly, you earn nothing if you stop working. Don’t get me wrong, you can still make a comfortable living, but your earnings will be limited by the hours in the day and how much you can charge per customer.

The Entrepreneur

This is the person you’d rather be if you’re in business for yourself. You are an entrepreneur if you sell a product or a service that is scalable. The earnings of an entrepreneur are not scaled with the time spent working, but on sales. A typical example is the author of a book. You will spend time writing the book (say a year), but if it makes the best seller’s list, you’ll make revenues for every book that is sold until you die.

If you’re still fuzzy on the differences, we’ll see how the two can increase their earnings.

Entrepreneur vs. Freelancer

Imagine Jim the Entrepreneur and Bob the Freelancer. One sells software to companies, while the other sells software coding services, who both get into business for themselves on January 1st.

At first, Bob may be in a better position. Jim needs his help to build the software he’s going to sell in the future. Bob is a great coder, so he charges a nice $7,000 a month to be retained full time. Jim hires Bob to develop his software, which took 3 months. On March 31st, we have Bob who earned $21,000, and Jim who has a -$21,000 debt.

On April 1st, Jim can finally start selling his software, for which he charges $400 per month with a yearly contact to each client. Over the next 3 months, Jim signs 10 accounts each month. Meanwhile, Bob has found full time work and is keeping his $7,000 per month earnings. On June 30th, Bob has $42,000 in the bank, while Jim finally broke even and has $3,000.

Jim’s earnings = 10 accounts * $400 in April = $4,000. These 10 accounts will keep paying him every month. In May, he signed 10 more accounts, who will also pay him $4,000, on top of the $4,000 from the previous month. In June, he signs on 10 more accounts, who will also pay him $4,000, but he is getting the revenues from the April and May accounts. In April, he earned $4K, $8K in May, and $12K in June = $24K earnings

In July, Jim signs on 10 new accounts, while Bob is working full time. In August, Jim launches a Google campaign and gets an additional 20 accounts. Bob is still working full time. In September, Jim decides he’s done working for the year. Bob still puts in another month of full time work. On September 30th, Jim is looking good with $67,000 in earnings, while Bob is comfortably at $63,000.

And now we have the A-ha! moment! Jim has stopped working until the end of the year, but his recurring revenues let him finish at $139,000 on December 31st. In October, Bob finished working on a client’s project, but that only occupied half his time ($3,500). He couldn’t find a customer for the rest of October, and struggled all the way through mid-December to get a new account. So he only made half the month of December ($3,500). This puts him at a year end earning of $70,000.

In case you were wondering, Jim could still not work a day until July 31st, and he would have earning of $291,000. Bob would need to work 42 months full time to reach those amounts, or he would have to charge more for his work hours. But as you see in the graph, if he stops working, he gets no revenues.

Monthly Earnings Report

FreelancervsEntrepreneurMonthly
In the monthly earnings report, you can see

  • Jan – March:Negative earnings for Jim as he pays Bob to code the software
  • April – August:Increase in monthly earnings as Jim signs on new accounts
  • October – December:When Bob’s not working full time, his revenues crash
  • August – July the next year:Jim’s monthly earnings report, even though he stopped working

Cumulative Earnings Report

FreelancervsEntrepreneurCumulative
See how Jim catches up to Bob’s cumulated earnings in September even though he stopped working a month earlier.

The Takeaway

If you’re a freelancer, know that there is an earnings ceiling to your business unless you can convert it to an entrepreneur model. I chose this example specifically with 2 players in the same industry so that you can see how one small difference in the business model can make a world of a difference in revenues and quality of life.

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