There’s no ‘right’ way to be self-employed, just tradeoffs

I get the following question a lot:

“What is the difference between being a freelancer and running a business?”

Or,

“I want to be self-employed, but I don’t want to run a business. How do I do that?”

And the like.

Technically speaking, there is no difference between freelancing, being self-employed or running a business. As soon as you start doing something in return for payment — like writing articles, refinishing furniture, doing interior design or walking people’s dogs — you’re running a business. It may not feel like a “real” business, but it is. Being a “freelancer” or “self-employed” basically means earning money not as an employee, which by default means you’re in business for yourself.

But everyone who asks this question intuitively recognizes that there are some real differences between being a freelancer and running a larger business operation. And it’s not just a difference in size. In a nutshell, freelance businesses offer more short-term freedom and lower financial risk than larger businesses, and have a more limited potential for long-term freedom and higher profits. A big part of this dynamic is that freelance businesses don’t typically develop operational systems, which is understandable when there’s only one person (or maybe two) running the show.

Still, systems are essential to long-term freedom and growth. So it’s important to understand these trade-offs when deciding what kind of business you want to start.

For example, consider a simple freelance business – say, as a photographer, caterer or writer – with no employees. You can typically start something like this with very little start-up money and you can have a lot of personal freedom since you don’t have to worry about managing an office or staff. You can accept or decline clients at your own discretion, make your own schedule, and just be totally flexible about how you get things done.

The downside, however, is that the business truly can’t run without you. If you take time off, the business essentially shuts down. And this will continue to be true unless and until you transition the business to include staff (either employees or contractors). And it’s essential to manage the staff well, which means that policies and systems need to be implemented. If you don’t make that transition, the freedom you enjoyed when starting up will plateau since you’ll need to be involved on a day-t0-day level with the business to keep it running.

Contrast this with a business that is started with a higher investment of both capital and time — say, a photography studio or a café with a few (or more than a few) employees. It will be a more intense start-up experience, involving more money and risk, and a much greater time commitment since it will be essential to train employees well and build systems that will help the business run like a well-oiled machine.

But the reward is that in a year or two if things go well and you implemented systems successfully, you’ll be able to leave the business in the hands of the employees and managers you cultivated during the intense start-up phase. A business based on systems can earn money and profits even when you’re not working at it. That is a key difference. You won’t need to be around every day, all day, and if you’ve really done well you might even be able to afford to take a few months off every year.

Remember, neither approach to self-employment is objectively better or worse than the other; you have to decide for yourself what tradeoffs you’re willing to accept.