Self-employment: what are the advantages and disadvantages?

Deciding to go out on your own and set up a self-employed business is a big decision. It’s exciting, potentially hugely rewarding, and, with the proliferation of digital finance solutions and affordable at-home software, probably a better time now than ever.

On the flip side, self-employment can also be challenging, stressful, and comes with less job security than standard employment. This is why it’s important to heavily consider the decision, before making it, and to go in prepared. A decision made that is well thought out beforehand can increase the likelihood of success, while softening the blow in case of failure.

In this post, we’re going to help you make that decision. We’ll propose a few crucial questions you should ask yourself in preparation, and then we’ll weigh up the advantages and potential disadvantages, so you can apply them to your own financial situation.

It might sound like a redundant question, but defining self-employment is crucial if you hope to succeed. Doing so goes further than understanding simply that you are your own boss. How your type of self-employment is defined will depend on where you set up your business.

Depending on where your company is based or where you intend to freelance, you will have to register according to regional requirements. Beyond the red tape, you will then likely have to choose what kind of self-employed worker you plan to be.

This choice is decided by a number of things:

• Income
• Whether you will employ workers
• Trade associations you belong to
• Part-time or full-time hours

In Germany for instance, if you wish to work as a freelancer, you need to distinguish between what is called in Germany a ‘Freelancer’, ‘Freiberufler’, and a ‘Gewerbe’. In short, Freiberuflers practice certain professions like law, medicine, tax advisory, etc., and Freelancers fall more into the category of marketing professionals and graphic designers. Registering as a Gewerbe means belonging to a certain trade association and is one of the first steps towards becoming self employed in the country.

Each country will have its own distinctions within the self-employment sphere. In order to succeed in the way that best suits you and your business, make sure you research what kind of self-employed worker you are going to become.

Once you’ve done the correct research and decided which kind of self-employed structure best suits you, it’s time to ask the hard questions. Overall, you need to decide whether, right now, self-employment is the right decision for you.

To help you with this question, we’ve broken it down into specific queries that can prompt you to review your own situation at these early stages. If you find you can’t answer these questions or you’re answering no, you may have some more preparation to do before becoming self-employed.

This might sound like an obvious question to many. Of course you have an idea, your idea is to run a business! But ask yourself, what kind of business idea do you have? How specific is your plan beyond wanting to go self employed?

The entrepreneurial world is competitive. Entrepreneurs use self-employment to fill gaps in the existing market of ideas, essentially supplying a need for which there is no solution (or no better solution) yet. And even though new technologies create new needs, the existing gaps in these markets fill up fast.

To compete, your best bet is to have a clearly thought out idea, preferably one that caters to a niche audience with the potential to grow into other areas. Finding a business idea means answering questions like these:

• What does my potential customer base want that I can provide?
• What do I enjoy doing?
• How can I take inspiration from my day job?
• What are today’s trends and emerging technologies?

Engaging with these questions means treating them like avenues down which you can find new inspiration for a better and clearer business idea.

To further unpack this step towards self-employment, read our post on how to find a business idea.

It’s likely that, if you’re serious about self-employment, you already have some financial backing. This may be in the form of a business loan, savings, family money, or an investor. If you don’t, it’s time to consider what your options are for starting your business with enough funds to soften the blow to your finances.

Determine what you need. Crucial to this step is actually understanding how much you need. This is no time for ambitious estimating or fantasizing—you need to soberly calculate the financial needs of your business at its beginning, and how you plan to cater for growth, emergency funds, pitfalls, and more.

Secure venture capital. If you already have a business idea—ideally with a catchy business name—you can start to attract investors who may be interested in your idea. Establish a clear business plan and first, if possible, approach people who know who are interested in investing. This means you can cut out some of the research you will otherwise have to do into your potential investors, if you don’t know them.

Consider crowdfunding. Again, very dependent on having not only an established business idea and plan, but also a large number of people willing to make small to medium investments in your business. Crowdfunding is a wonderful opportunity provided to entrepreneurs by the expansion of the internet, but there are dire consequences should you fail to deliver on what you promise.

Consider small business loans. If you feel confident in your ability to generate revenue, then taking out a small business loan could be a low-risk alternative to securing venture capital or seeking out investors. This is because these loans lay out their terms clearly, and come from established businesses and governmental institutions, who will only approve you if you can provide evidence that you will pay back the loan accordingly.

We’ve also explored these funding methods further in our post on ways to get funding for your new business.

We often don’t like to consider a backup plan before starting out on our own. We’re too full of optimism and excitement to entertain the idea of failure. But backup plans are your lifeline in the event of a worst case scenario. More than that, with a backup plan, you may have the chance to again start your business at a later date.

It’s also important to expand your understanding of what the potential ‘failure’ of your business can be attributed to. Beyond your mishandling of the business, there are many things that can influence success:

• Economic recession
• Oversaturated market
• Personal tragedy
• Health problems
• Change in trends/customer interestAll of which can happen outside of your control. Creating a backup plan isn’t only in case of your inability to run a business properly—it’s about taking a realistic view of the world of business and making sure it doesn’t swallow you whole.

Keep your day job until you can quit. And even then, consider the possibility of returning to employment in case things don’t go well. This means leave your place of employment on good terms and stay in touch with your old employers.

Keep your resume updated. You might think you never need to go near a resume again once you begin self-employment, but this isn’t the case. If you suddenly need some extra cash to keep your business afloat with part-time employment, you don’t want to waste time digging up your resume file and making changes as quickly as you can. Make sure, before you start your business, your resume is in tip top shape.

Strengthen your professional networks. In times of need, the people close to you are the ones who can help. This is true of business, and maintaining this safety net means establishing a reliable network of other professionals. They may need guest spots on their own websites, employees, or they may be looking to invest.

Get qualified for other work. A degree in a different line of work is especially useful for artists establishing themselves via creative work. If you have a degree in a more stable industry, you can resort back to this and find work quickly, while continuing to support your artistic endeavors. Music Youtuber Anthony Fantano has a useful video on fallback plans which is worth watching to help you prepare.

One of the best ways to begin self-employment safely is to halve both your employed work, and your part time work. This is in part because starting a business while employed full time is going to run you ragged and probably cause you to burn out on both your self-employment plan and your day job. Fortunately, there’s a solution to this.

While ‘side hustle’ often has the connotation of something on the side of your full time job, certain employers and countries will allow you the possibility to half your hours so you can focus on your own project on the side.

In Germany, you can request part time hours from your employer so that your working hours will not exceed 20 hours per week. If your business becomes successful while still operating it as a side hustle, this may even mean increasing your monthly revenue above an average full-time salary.

Find out if this is possible from your employer and if there are established guidelines where you currently work.

If you wish to learn more about running a side hustle, both generally and in Germany specifically, read our post on becoming a sidepreneur.

Perhaps the most important concrete plan of any hopeful business owner is the writing of a business plan. Your business plan is going to be useful when presenting your idea to potential investors, potential employees, and it will also help guide you in the direction you wish to take your business plan.

There are three types of business plans, each of which may be better suited to your goals:

• Traditional business plan: lengthy, in-depth, ideal for convincing investors
• Lean business plan: nonspecific, fast, ideal for startups
• Nonprofit business plan: appealing to donors, similar to traditional in structureOnce you’ve decided which kind of business plan you want to draft, it’s time to consider the components in more detail. This is the typical structure of an in-depth traditional business plan:

1. Executive summary
2. Business description
3. Industry analysis
4. Market analysis
5. Organization and management
6. Financial projections
7. Financing request
8. Appendix

For a full writeup on these sections and how best to write the business plan for you, see our post on how to write a business plan successfully.

Here’s a breakdown of the basic elements of self-employment, each of which has advantages and disadvantages:

Self-employment isn’t preferable over employment one way or the other. It’s a personal choice with its own advantages and disadvantages, and undertaking it means weighing those up and deciding if it comes out on top of employment for you specifically.

Things like financial security, working hours, and personal autonomy all fluctuate depending on which path of employment you choose. They also all suit certain people better or worse. The best way to make any decision, especially one as financially fraught as this one, is to weigh up the perks and the challenges.