I’ve had several friends ask me what steps I took to start my software consulting business. Many people are miserable working at their 9-5 job and want to work for themselves, but don’t where to begin.
My advice is to start by figuring out the absolute minimum income that you could live off of. Why do this? One of the scariest parts about starting your own business is giving up the security of a regular paycheck. Knowing the absolute minimum that you need to earn helps to alleviate that fear.
Figure out Your Minimum Required Income
It’s shocking to me how many people have no idea what their monthly expenses are. I use an app, YNAB (You Need A Budget), to track my expenses and set a monthly budget, and I couldn’t imagine living without it. If you don’t know your monthly expenses then you have no idea how much income you need to earn. So take the time and figure out your monthly expenses first!
When figuring out your monthly expenses, make sure to include infrequent expenses that you may only get charged once or twice a year. Things like car insurance, Amazon Prime, renters insurance. Anything you can think of that you pay infrequently. To turn a yearly expense like Amazon Prime into a monthly expense, take the total and divide by 12. Simple enough. You also likely have unpredictable expenses like car maintenance or travel. Do your best guess and estimate what you might want to save each month for these expenses. Again, you can learn a lot more about budgeting and expense tracking at https://www.youneedabudget.com/.
When figuring out my monthly expenses, I tried to estimate high for anything I wasn’t sure about. I’d rather find out that I thought I needed $4,000 a month, but in reality only need $3,500 a month, than the other way around.
Once you figure out your total monthly expenses, the final step for figuring out your minimum required income is to account for taxes. If you’re based in the United States, one simple method is to assume you will owe 30% in taxes on any income you earn while self-employed.
Thus the final calculation becomes:
Minimum Required Income = (Monthly Expenses / 0.7)
What about Health Insurance?
One big item that everyone always asks about when looking to become self-employed, health insurance. Unfortunately, in the United States, health insurance is tied to your employer. I think this holds a lot of people back from starting their own businesses, and hopefully one day that will change. But for now, if you’re in the US, you have a few options for health insurance. If you’re married and your spouse has health insurance, lucky you, you can just join their plan. Otherwise, if you’re single you’ll have to purchase your own health insurance. As a single male in my 30s, fairly healthy, living in Southern California, I estimated about $500 a month for health and dental insurance, and this ended up being fairly accurate. Obviously this number could vary wildly based on your situation, but give it your best guess and aim high.
Finding Your First Client
Ok, so now you know the minimum income you need per month to live off of (you did take the time to figure this out right??). How do you get clients?
First, ask yourself, what does your employer pay you for? Maybe you’re a software developer, or a designer, or you help companies implement certain software and/or processes. Perhaps you’re a chef at a restaurant, or you work for a cleaning service. I can assure you, whatever it is you do that your employer pays you for, other companies will pay you for those same services, as long as you’re willing to put in the work to find them.
Finding clients is one of the most difficult parts about being self-employed, and here’s where it’s helpful to have a large network of people that you’ve previously worked with. I didn’t start my software consulting business until 10 years into my career, and it was much easier than if I had only been 2 or 3 years in. Easier, but not impossible.
When you’re first starting out, the easiest way to find clients is by contacting people that you already know. Make a list of everyone you’ve previously worked with, or anyone that you know in a professional sense. LinkedIn is great for this. Go through your entire connection list and record the contact info of anyone that you want to reach out to.
Next, contact each person in your list and tell them what you’re up to and ask if they have any work they could hire out to you.
For instance, when I was starting, I sent out this exact email:
Subject: Catching Up
Hi [First Name],
I hope you’ve been well and that things are going great at [their company name] still! I am starting a software development agency and wanted to reach out to you to see if you’d be interested in working together again. Since leaving [company we worked at together] I’ve continued working in web development, but also app development as well, so there are a wide variety of projects I could help out with if you’re looking. Let me know if you’d like to talk more, it’d be fun to work together again :)
I was pleasantly surprised at how receptive most everyone was. Colleagues that I hadn’t talked to in years responded. Some didn’t have any work, but wished me luck. Others wanted to set up a call to discuss potential projects.
The biggest switch from full-time employment to self-employment is that in the beginning the work doesn’t come to you, you have to find the work. So tell anyone and everyone about the services you’re offering!
Form an LLC
While doing your initial outreach to your network, I highly recommend forming an LLC. The best and cheapest states for this are Wyoming or Nevada . I used https://www.wyomingagents.com/. It costs $150 the first year, and $122 a year after that. Compare this to California which costs a minimum of $800 a year!
There are two reasons for forming an LLC.
First, you can get an EIN number (apply here). An EIN number is like a social security number for your business and is used to file your taxes. Having an EIN also means that you don’t have to send your clients your social security number for their tax forms, as you would if you were a sole proprietor.
Second, after your LLC is formed and you have an EIN, you can setup a business checking account. It’s important to keep your business income and expenses separate from your personal accounts.
Let’s imagine a client pays you $5,000. Because you’re a contractor, no taxes are taken out of that $5,000. If you didn’t have a separate business bank account, the $5,000 would be sitting in your personal bank account. It’s then real easy to think of that $5,000 as “yours”, when in reality you owe the government about 30% of that or $1,500. Conversely, when you’re paid directly into a business account, you can move $3,500 into your personal account and keep the remaining $1,500 stored away separately for when the tax bill is due.
Open a Business Checking Account
I opened my business checking account through Capital One because I wanted an online bank and simple sign up process. However, I can’t recommend them as the sign up was anything but simple and took several months of back and forth with customer service to get my account set up. If I were to do it all over again, I would open an account with my local credit union.
Sign up for a Business Credit Card
In the same way that it’s helpful to track your business income in a separate account, it’s just as helpful to track your business expenses on a separate credit card. I use the Capital One Spark business card for its simple rewards program and no annual fees, since I don’t have many business expenses at this time. There are better rewards cards out there if you have higher monthly business expenses. Tracking all of your business expenses on a separate credit card makes it sooo much easier to deduct your business expenses come tax time, since they aren’t mixed in with your personal expenses.
Trust me, as someone who for years did part-time freelancing without a business checking account or credit card, separating these out was a huge game changer. You will save a ton of time and energy during tax season, not to mention money, as you’ll have a concise record of all your business income and expenses.
My last piece of advice for starting your consulting business. Once you know your minimum required income, nothing matters more than finding clients. This is hard to do if you’ve never done it before. When we’re faced with challenging tasks it’s easy to distract ourselves with other tasks that we think are important. Maybe that’s tweaking the color scheme on your website, or testing out five different CRMs trying to find the best one. None of these efforts will get you paying work. So until you have your first client, 95% of your time should be spent looking for clients, everything else is insignificant.
If you’re thinking about starting your own consulting business, I hope this has helped you. Email me at firstname.lastname@example.org with any questions you have, or if there’s anything I didn’t cover that you would like to know. I would love to hear from you!