A: Great question, and a really important one to get some clarity around before you hit Go on any business or career.
A lot of people use many of these labels interchangeably without understanding their definitions.
For example, about two years ago I was speaking to an IT contractor at my last employer. He mentioned that his contract was ending and he was looking for another role. He had the fancy dancy business card with his company’s name (well, his name). He kept talking about all of these amazing things he did. Most people would be really impressed, thinking he owned his own company (translation: he’s able to support himself with his skills, so he must be a decent IT consultant, right?). Since I was the other part of this story, though, I knew better. I asked him a few questions about how he worked, earned clients, etc. Well, fancy business card aside, he was what I call a dependent contractor (more on that later). He didn’t own a company – he just had a card. Since I’ve been one before, I knew exactly what his deal was. And once I did, I could change the types of questions I was asking him in order to better serve his actual needs.
I work with individuals ready to start all types of businesses. This means I spend considerable time getting them clear on HOW they want to work. I love the initial energy behind wanting to make your own money, but it quickly leads to frustration if you aren’t aware of what you are getting in to.
Simply put, HOW you choose to work makes a big difference in how you set up your new business. Doing it right in the beginning will save you a lot of stress and trouble.
Little FYI: this may require some re-reading. It’s a big question, so focus on the 2-part breakdown.
The Employment theme park
The ups and downs of business are often compared to a roller coaster. It’s an amazing ride if you get in the right roller coaster for you.
You have an all access pass to this theme park. How you spend your time is up to you. You can choose to ride one roller coaster (business) the whole time, or you can try a few of them.
BTW – this is a special theme park, because you can actually ride a few rides simultaneously.
Part 1: Employee vs. Self-employed vs. Contractor (the really simplified version)
Employee: You work for someone in exchange for a salary and benefits. They define your role, what you do, and how you do it (to a degree, but I won’t go down that rabbit’s hole right now).
Ex. You are a graphic designer in the marketing department at Google.
Self-Employed: The general term for someone who owns their own business. Yes, you can be an independent contractor and self-employed.
Ex. You are a graphic designer with your own studio. You do some contract work for Google as well as through your website. Both streams make up your income.
Independent Contractor: You work for yourself. People hiring you tell you what they need, but you choose how you do it.
Ex. You earn graphic design work through your website and client portfolio.
Dependent Contractor: I might be making up this term, but I think it’s important to get this straight. You can be a contractor at a company but actually employed by someone else. We had all sorts of them at my last role (like my earlier example), and very few of them were actually independent contractors. No, a business card doesn’t make you a business. Essentially, you have someone finding you roles, and they cut you a check less taxes. The roles usually aren’t permanent, and if the employer/agency can’t find a role for you, you don’t work until they do.
Ex. You have a staffing agency that finds you jobs. They pay all taxes for you, and you can’t write off expenses.
In the US, the easiest way to differentiate these are by answering how you are paid (W2, 1099, etc.). (Did I just call taxes easy?!) I’m not an accountant, but thankfully the internet is filled with great answers.
Consultant: Just to throw this one in here, a consultant assesses a clients needs and provides guidance and advice on what should be done. A contractor can do the same, but often they focus on doing the work. I’m not going to get in to the nitty gritty here. Just know there is a difference. Consulting is a role description, not a type of business.
Part 2: Intrapreneur vs. Entrepreneur vs. Freelancer (I LOVE this topic so I’ll try to be brief)
Intrapreneur: These are an entrepreneurs within a company who create new products and ideas to benefit the company. They use entrepreneurial skills but assume no risk. Some might argue you have to create a profitable product, but I disagree. You can be an intrapreneurial process geek like me and focus on streamlining and developing new workflows and standard reporting techniques. I still consider that being an intrapreneur even if it isn’t part of your job description.
Entrepreneur: You own your business and make stuff. Gidgets, widgets, and all the rest. You hopefully make a profit, and you definitely have all of the risk. You have this never-ending urge to create solutions to problems and/or you create solutions to problems people didn’t even know they had.
Freelancer: Ahhh, now this is one of my favorite areas to work with people on. Seth Godin introduced me to this topic – freelancer vs. entrepreneur – and I’m not going to try and one-up him. He explains it here (23 min podcast) and here (short blog), so I’ll just paraphrase him as best I can. It boils down to how you work and grow.
- A freelancer can’t scale the way an entrepreneur can. A freelancer’s business is the freelancer themselves. If you are a writer, you can’t clone yourself to write more (although you might want to). Seth is a brilliant freelancer!
- An entrepreneur can scale because they are building a product or service that can be replicated. Seth Godin uses Mark Zuckerberg as an example of an entrepreneur. He built Facebook, and he built a team to sustain and grow Facebook. He doesn’t actually code anymore, because his entrepreneurial focus is on growing.
Phew! We got through that question.
I can expand on any or all of these topics at length, but no one wants overwhelm.
If you do want more, please leave questions/comments below. And if you are ready for a more personal conversation, though, please set up your free Get Acquainted Call with me. I seriously love this stuff!