Ah, business world!
Not many words are out there causing so much reluctance in IT as business, marketing or sales. Especially causing it in people at the beginning of the road in software development. Nothing weird about it, those are not easy subjects! Specifically for us – technical people in love with numbers or documentations. Some say you either adore or you hate the business world.
And I ask why not just deal with it? Why all the emotions come along?
Among the people having between 0 – 5 years of commercial experience I usually meet two kinds of programmers. Employees and freelancers. The most basic distinction between them is the conflict on the line of security – freedom. Having to deal with any of the real business world properties (no, talking to ‘business people’ doesn’t count) is usually connected with the second one. Both sides present valid points and I can agree with most of them.
But who said we don’t get to have security along with freedom?
Why would I want security?
Why the hell would I not?
What’s wrong with
- having a comrade by my side that will help me solve a very complicated problem;
- not having to worry about getting another deal before the bills stuck up on my desk;
- having free trainings, books, knowledge and all that stuff being served on a golden plate?
Not worrying about technical problems so much, having guaranteed amount of money each month, having provided knowledge in a ready to absorb state. With those kind of benefits we can focus on so many more productive things!
Now, be honest. How have you used that extra time and resources so far? Don’t worry, it doesn’t come natural.
Why would I want freedom?
Freedom is scary, freedom is complicated, freedom is no free time and a guaranteed stroke before 30s!
What can I say?
Well, not sure about a stroke – it’s still ahead of me.
Oh, and freedom is also
- doing things my way;
- dealing with EVERYTHING by myself and – if I don’t have a good social network – paying for help;
- working on my own brand;
- earning bigger money;
- spending less money (tax deductibles);
- better deals (e. g. car, electronics, telecommunication)
- working where and when I want
- No labor code/employee protection – I’m on my own
- Dealing with a real bureaucracy
If I don’t like this client – I will get rid of him. I want to create my own product – I do it. I want to have half of the year off – I do it.
Sounds pretty good, right? Not always is. It would take me ages to point out each property of both sides in detail and I’m sure you already recognize some basic arguments of both sides – so pardon my simplifications.
Which side I’m on?
Why woudn’t I choose both?
I’ll be frank with you, I’m not the type of the business person. I’m not like the Wolf of Wall Street or Steve Jobs. I’ve always been an introverted and shy person. If you would have seen me 8 years ago you would not say I’m the proper business type. And still, I opened my first company when I was 22 years old.
In my pretty short life I had episodes with secure, almost cuchy jobs and I also lived from one small contract to another.
And always after some time I felt bad.
Bad money, boring jobs, overwork – doesn’t matter. Something always felt wrong.
I was stuck in an endless cycle from security to freedom and back to security. Until I decided to combine both together.
Taking step forward
Note: I live in Poland and I run the business in Poland. So my observations and tips will apply mostly to Poland. Can apply to other countries too, but not necessarily have to.
Let’s say I am a typical programmer with a job in one of many IT companies. As an individual working in a regular employee – employer relationship I am doomed to make use of the regular legal framework called labor code.
Labor code has been designed to regulate complicated relations between two parties in order to try and satisfy both of them. It’s inflexible, rigorous, but in many ways it protects employee rights and allows people to disable vigilance during agreement review (not recommended: just a common practice and anti-pattern).
Labor code comes with a lot of overhead. It has a strict regulations about mandatory tribute to the current ruler that has to be deducted of my wage. We could argue if this is fair or not, but this kind of discussion is absolutely useless – it won’t change the fact the labor code comes with this in a packet.
As a typical programmer let’s see how the distribution of the cash would look like in a hypothetical situation. Numbers are just an example and the currency is not needed here.
Amount I negotiated with an employer after taxes: 10 000 units
How much employer has to pay for me: 17 195,13 units
Calculation is pretty easy, I will have to give up almost 42% of the money I earned. In return I have security and all the benefits of the labor code. The question is, are those benefits worth 42% of the wage?
If I would spend 2000 on material pleasures or business expenses and keep the rest on a saving account for 40 years I could have tons of money! And still I would have my initial 10000 to spend for anything I want!
Let’s see, I will calculate how much money could i save if I would have it for myself:
PV (Present Value) – 0 units: the amount of money with which I start the investment
P/YR (Payments per year) – 12: how many times a year I will insert money to the saving account
N (Number of payments) – 480: count of all ca
I/YR (Interest per year) – 2.2%
PMT (Payment) – 5000: how much money i will insert to saving account each month
As it’s just a regular saving account I assumed the interests are capitalized each month.
FV (Future Value) – 324 046.49
Wow. This is how much money I would pay for the convenience of having the labor code benefits. Just after two years of saving this money instead of spending it on government services I could have over 15 months of vacations with not lowering my income below 10 000 units!
What is better for you? You have to decide, I already did.
Opening a company
Saving on labor costs is not the only optimization I perform with my own company. Every income generated by anyone has something called income costs. That basically is the amount of money you have to spend to generate the bigger amount of money. Our gracious ruler allowed us to deduct that costs off our income tax. As a result the more you spend on generating income, the less taxes you pay.
Everyone can do it. In fact, if you are an employee with the agreement based on the labor code – they do it for you automatically.
How nice of them! But, hey, how do they know how much did I spend on gas or coffee during the year – as those would be the costs of my income?!
Well, they don’t. So they give you a fixed percentage of income to include as income costs. It can vary, but it is always fixed, no matter how much in fact you spent.
In some way it’s nice that I don’t have to worry about this. But on the other hand if I want to be in control of my finances, optimize them or I just have a big income costs – it’s not that pretty anymore.
As an entrepreneur I am able to use every cost that helped me generate income to reduce my taxes. That could be a leasing installment for a car, internet bill, coffee, gas, cell phone bill etc. If I combine all those costs they can stuck up to a pretty sum that will deduct my tax!
There is one more thing called VAT (VALUE ADDED TAX). I’m obligated to include it as part of an invoice for my services. Ss I work mostly on b2b basis – my clients are mostly companies and for companies VAT is neutral – I can register as a VAT payer. That can be used to generate great savings.
Let’s assume that VAT rate is 23% (it really is in Poland!).
- Given: I sell my services for 10 000 units + VAT
- I will receive 12 300 units on my bank account payed by my client. 10 000 is payment for my job, 2 300 units i will have to pay to the government as VAT.
- When: I buy a computer for 5000 units with VAT included
- Then: I subtract the amount of VAT I paid for the computer (934.96 units) from the amount of VAT my client sent me (2300 units)
- The result (1 365 units) is the amount I now have to transfer to the government instead of the original 2 300 units.
- At the end after paying VAT I have 5 935 units + a computer, so really I paid 4 065 units for the computer. As a regular individual I would have to pay 5000 units.
See the profit? It’s there and it’s obvious! Your client doesn’t mind paying you 12 300 with VAT, because as i said it’s neutral to the companies. He will deduct it just like you off something else. But I will not describe every technique for the tax optimization here, because:
- There are plenty books about it written by way more smart people than me
- There’s too much stuff to pack it into a single blog post
Alright, so by now you should ask: where’s the catch?
It’s simple – most of the stuff related to the company will require for you to hire a professional. Plain and simple – if you’re don’t have a very detailed knowledge about finances and a lot of time to deal with it – you have to do it.
Is that really the catch? Well, it generates costs. So along with the other costs of conducting your business (fees, taxes and other fun stuff) it is the factor to consider if your predicted earnings will be bigger after opening the company instead of working as an employee.
But hey, it generates costs I said before – income costs to be exact, so it will deduct your taxes. See, it’s not that hard!
When you’ll get a hang of it – it opens up almost unlimited possibilities. Find your idea of freedom and implement it then!
And what about security part?
This is the part that distinguish this post from a millions of guides about opening your own business. The idea is pretty simple:
- Start a regular recruitment process in some company
- Inform them that you can work on a b2b basis (not all companies allows it – but some of them are excited about it. you will cost a lot less money to them)
- Negotiate salary and benefits – here it’s important to include some of the labor code benefits that you care about. For example paid leave, paid sick days, health insurance or whatever you need
- Those probably will be though negotiations – but remember that for that company granting you labor code benefits on b2b is not that painful as paying a regular labor costs on a regular employment agreement. Don’t worry they’ll live – now focus about providing yourself security
- Don’t forget about some reasonable notice period – I usually have 1 month. it’s enough to get another client in case of a catastrophe.
How is that different from a regular employment? if you negotiate right, you can end up with most of the benefits of being employee and a freelancer.
Additionally, the company often will provide you with plenty of connections and possibilities to build your brand in their name.
You can go to a conference as a designated company speaker, you will meet and get to know a lot of people from the client side. Why is that a benefit? People don’t usually work their whole life in one company. Some of them opens up a business after working their way in a corporate ladder. They will remember people they liked working with. I assure you, you will be first on their list to hire (happened to me).
You don’t have to work full time, it’s up to you how you want to divide your work capacity. I work for at least 4 clients at the same time, for one of time full time and I still have time to work on my own projects that I hope to release soon.
Take care of yourself
The most important thing is to remember: your clients/employers don’t owe you anything more than they promise in a contract. You don’t owe them anything more too.
Nobody will take care of your security, wealth, happiness better than yourself.
It sounds cliché, I know right?
Sorry, but many people don’t see it. They over-attach to employers, clients, employees. Hear and see what they would prefer to hear from them. I don’t care – as long as I have connections and skills and can turn them into things I want.
I’m not saying to be a machiavellian asshole – just be a machiavellian sweety. Work for yourself. Always negotiate and connect with people. Be secure and free.
- This approach allows me to save me a lot of money with all the tax optimization and negotiations
- Instead of looking for clients, they try to book in for at least some part of my time.
- I have enough of basic income to decide which client I want to work for
- One of my clients provides me with additional learning
- I have a platform to create and distribute my own products and social network to share it
- I will end up here, this post is getting too long
I hope you learnt something new about how to improve your life, increase income or provide yourself some security. If you have additional tips, please share. Let me know your secrets.