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Freelancer vs. Small Business Owner: What’s the Difference?

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Want to work for yourself, but not sure if you should freelance or build a small business? When considering the role of freelancer vs. small business owner, ask the following questions:

  • Do I want to hire employees, or just work alone?
  • If my business grows quickly, would that be a good thing? Or am I willing to turn away opportunities and grow at my own pace?
  • Am I prepared to deal with the complicated paperwork, legal filings and financial loopholes that come with running a business, or would I rather leave these aside and focus on delivering quality work to my clients?

You might think freelancers and small business owners are one in the same. In fact, both roles have different goals, responsibilities and risks.

The difference between freelancer and small business owner responsibilities

A freelancer works solo as a contractor for clients that pay by the hour or by the project. A freelancer’s goal is to fill only their own available time, securing jobs that pay well and are a dependable source of work. In many cases, freelancers don’t need a business license or any formal registration with the government to operate, though it’s always a good idea to check with your city.

A small business owner might start out working alone, but wants to (eventually) hire employees and build their business into something larger that brings in stable and constantly-growing profits. Small business owners focus less on the actual delivery of products and services — that’s up to employees — and more on running and growing the business.

Small business owners need to deal with business taxes, regulations and employee issues along the way. Funding a small business is also a challenge when starting out, while freelancers usually operate with very low overhead.

Tax obligations

Both freelancers and self-employed small business owners owe self-employment tax to the IRS. Self-employment tax includes Social Security and Medicare contributions that employers typically withhold from employees’ paychecks. As a business owner hires employees, their tax responsibilities also include withholding the proper employment taxes, as well as reporting wages, tips and other compensation paid to employees.

Pros and cons of being a freelancer

Freelancing gives you a great amount of freedom over the type of work you do and when you do it — but that flexibility can come at a cost. Here are a few advantages and disadvantages to consider.

Pros

  • Flexibility: Having a flexible schedule is great for people with young families or a family member who needs special care.
  • Control your workload: For example, if you have school-age children, you might pass on a summer project to enjoy afternoons at the pool with your kids.

Cons

  • Unpredictability: As a contractor, freelancers sometimes have little to no warning of a client ending an engagement.
  • Workload gaps: It’s difficult to market your services when you’re in the thick of other projects, which can lead to gaps in your work schedule.
  • Difficult to plan ahead: Working freelance can also limit your ability to grow your income, since there are only so many hours in a day that one person can work.

Pros and cons of being a small business owner

Starting a small business requires meticulous planning. You’d need to write a business plan, choose an entity type and secure funding, among other necessary steps to launch your operation. Before jumping in, think about a few benefits and drawbacks of owning a small business.

Pros

  • Unlimited potential: You can grow your small business to whatever levels you desire, or sell it when it reaches a certain point. With proper planning and foresight, you can raise the business to operate and scale without you.

Cons

  • Solely responsible: Owning a small business is like having a baby: It’s a never-ending job that doesn’t conform to business hours or vacation schedules. Problems pop up when you least expect, and it will test your limits in ways you never imagined. But, as with children, when you’ve successfully raised the business to maturity, you’ll feel immense pride.

Freelance vs. small business: Which one is right for you?

Freelancing and owning a small business both require an entrepreneurial spirit and a desire for freedom. These titles both allow you to be your own boss, though being a small business owner would give you the opportunity to also manage others.

Deciding which is the best for you, personally, requires weighing your ultimate goals and the risks involved.

 

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