Why Should Successful Corporate Employees Not Start a Side Business?

The following is a guest post by Sunil from The Extra Money Blog.

I just realized that everything I have been blogging about to date has been horse crap.  It is absolutely false information that has misguided so many aspiring corporate employees to start a side business.  As a result, an outraged group of “side-giggers” set my house on fire.  But then I woke up this morning and realized that it was just a bad dream.

Yeah. I made that dream up. A dream which is counterintuitive to everything I stand for and talk about on my blog.  But hang with me for a few sentences here and there might be a valuable take away for you, especially if you are in a successful corporate career.

The Value of Your Time

Should you start a side business?  That question can be partly answered if you know the value of time.  Do you know what your time is worth to you and to your employer?

Consider this example. Let’s hypothetically assume you are a consultant and make the equivalent of $60 an hour.  What do you think your employer makes for every hour you work on your client?  Your client is really your employer’s client, and because your employer has to pay you as well as for your computer, office rent, lavish lunches and dinners and much more, they likely bill your client 5 times what you make, or $300 per billable hour that you work.

From the above example, we can conclude that one hour of your time is worth $300 to your employer and $60 to you.  Do you see an opportunity here?  Are you thinking about getting on your own and providing the same consulting services to your own clients at a rate much lower than what your employer charges but much higher than the $60 you get paid?

Although you may not be able to charge the full $300 to your client if you worked for yourself, you may be able to triple your hourly wage easily while getting more time off from work too.  The fundamental question to answer is what is your time worth to you? Is it $60? Is it $120? Or is it $180?  In other words, are you willing to simply work more hours and make the same $60 you make at work?  Or is your free time worth more than that? If so, how much?  What can you reasonably expect to command and get paid if you worked on the side for yourself?

When Should You Start a Side Business?

If you are confident that you can make a lot more working for yourself, then starting a side business as a freelance consultant or contractor might sound like a no brainer to you at this point.  However, consider that there are limited hours in a day and the things you like to do with your free time.  How do you put a price tag on hours spent with friend and family, for fun and pleasure?

While the answer varies across the board depending on personal situations and preferences, only you can answer this question for yourself.  Whatever that monetary value or worth is, be sure that you are clear on it.  Lack of clarity can cause confusion, and often leads to professionals to accept side gigs that pay less than what their spare time is worth to them.

When Should You Not Start a Side Business?

Hopefully the answer is quite obvious at this point.  You shouldn’t start a side business if the return on time invested is lower than what’s acceptable to you.  I can appreciate that there are several other factors involved as well that may contribute to you taking up a lesser paying task in your free time such as a burning passion for an activity. 

For example, I am quite confident that FMF makes more per hour in the office than he does refereeing soccer games.  However, being out there on the field allows him to pursue his passion while spending time with his son.  The money is simply icing on the cake.

However, strictly speaking from a financial perspective, starting a side business makes sense if you project your business to earn you more money per work hour input compared to your career or job, therefore increasing your effective hourly wage rate.

Sure, you will still end up trading spare hours for dollars, but can you increase the dollars per hour significantly enough to compensate for lost free time?  Again, this is where the clarity of the value of your free time comes in to play.

If the answer is no, you might be better off spending your free time with family, friends and other activities that you derive pleasure from, unless of course you either desperately need the money, are bored or want to purposely indulge in activities knowing that it is a poor decision from a financial perspective.

Concluding Thoughts

Personally, it takes quite a bit for me to pursue a task that eats into my personal time.  I have done it sparingly on a selective basis, but the reason I have worked over the years to design systems and processes that work on auto pilot is so that I can increase my “personal time”.

I do realize that not everyone is in the position that I am in.  For numerous reasons, may successful working professionals start side businesses, and while I am a big advocate of doing so, many fail to calculate what their time is worth to them and therefore end up working for peanuts when compared to the alternative.

There are countless opportunities out there to make money, and some are better than others from a financial perspective.  A thorough evaluation of each opportunity is critical to ensure you are spending your time in a manner that provides the highest return on time invested.  Some factors to consider are scalability, investment capital, initial time requirement, ongoing time requirement, compliance requirements, cash out potential such as a sale, etc.

There are many blogs and websites, including mine, that constantly publish the top X business ideas, top side gigs, this, that and the other.  However, take a step back and evaluate your individual situation before diving into one.  Only you can answer what your spare time is worth to you.  Get clarity, pick wisely and don’t sell yourself short.

Comments

[Everyday Tips]

I think a lot of people give up blogging too soon, forgetting that many businesses are not profitable during the first year. If you work hard, you can definitely make money in less than 12 months since the start up costs are so low. However, it takes time, and it is definitely not just about sitting and writing posts. You have to market like crazy to get money with a blog, and many people do not realize that starting out and end up disappointed. You can't just write and expect people to magically show up at your doorstep.

[Beth]

Another reason no one seems to talk about is health!

Sorry, but when it comes to living well for the future, investing time in your health (like exercising and eating well) is crucial! If you can handle a side business without compromising a healthy lifestyle and making yourself sick with extra stress, then go for it! But don't forget to consider your health too.

[Matt]

Some employer prohibit side business that is related to your expertise. If I were to do a side job in building a house it is grounds for my termination from my employer.

Confilict of interests and liability issues. Period.

[Infinite Banking]

I understand the point you are making here. But I would encourage everyone to start a side business and learn how to put money in your own pocket instead of your bosses. But everyone thinks differently.

[texashaze]

Good post and definately a worthwile cause. My advice is to ensure there are no conflicts of interest with your day job. This means your business cannot offer the same services as your employer. It also means you should not do business with customers or vendors of your employer. Integrity is critical.

[Sunil from The Extra Money Blog]

@ EverydayTips - Agreed. The internet doesn't work like brick and mortars where if you build, they come. rather, you have to build, and then work hard to get the word out for them to come.

@ Beth - Excellent point and one which should be reemphasized. I am with you full fledge. Opportunities that deliver passive and residual income have always been my priority mainly to create the time I need to engage in other high priority activities. Health is wealth and nothing compromises my gym schedule

@ Matt - Yes - non compete clauses prevent you from doing so. Non competes can be negotiated in my experience. When I was a consultant, I was able to get this revised as long as I wasn't targeting the same size / tier (based on revenues) clients

@ I Banking - I am not advocating against starting a side business. In fact, that is what I stand for. What I am advocating is using your time wisely and invest it on initiatives that make financial sense. Like you said, everyone thinks differently so what makes sense to one may not to the other

@ TX Haze - Agreed. Even without non compete clauses, integrity is critical to maintain. We should all use our best judgment

[MBTN]

Good article with some good for thought. However I disagree with your statement that starting a side business only makes sense if your earnings per hour at your side business are greater than that of your regular job. Unless I am missing something, a side business is IN ADDITION TO your regular job, not INSTEAD OF it.

When you take on a side project, you should only consider the opportunity cost of what you would be giving up by working those hours as opposed to whatever other activity that you would be doing. The wage rate of your full time job doesn't come into play at all, because you aren't trading full-time work hours for side project hours. You are trading free-time hours for side project hours. The only thing that matters is how your value your free time.

[Sunil from The Extra Money Blog]

that is exactly my point MBTN - the value we often place on our spare time is proportional to how much we make in our careers (thus the perceived value of spare time). agreed that a side gig is something in addition to our professions, and not a replacement, but there are other activities as well that we all value in addition to our professions that take time. if a majority of one's day is spent working, and the more a professional starts to earn, the more the perceived value of free time becomes. that free time can be used to engage in those "other activities", which for some (based on the opportunity cost point you made) can very well be a side business, no matter what its earning potential is. for some however, unless the earning potential from the side gig is significant enough to where it levels or exceeds the perceive value of free time (like in my case), spending time on leisurely activities will likely take priority. did i clarify or create more confusion?

[Paul]

I am an electrical engineer, working for a large company. My company charges approximately 2.5 times my equivalent hourly salary, which is far below the 5:1 rate quoted in this article (i.e., $300 vs $60 per hr). The 2.5 factor increase is largely due to health insurance, retirement and vacation benefits that I am reaping, as well as company overhead (e.g., office space, utilities, office supplies, non-direct contract support staff, etc). I know many other people in the aerospace/defense industry who have similar 2.5:1 charge ratios. So I don't know where the author is coming up with all this money his company is charging to give his services, which he thinks he should collect directly by going freelance.

[Sunil from The Extra Money Blog]

Paul, I am a CPA and a CFA who worked primarily in banking, specialty financial services and private equity. It is not uncommon to see a 5:1 ratio, and even more. A public accounting senior associate today can potentially bill out at $275, but make $32 an hour (65k annually). Agreed that there are benefits that companies are providing employees, but have you ever run the math / analysis to determine exactly how much they are under / overpaying based on the calculation? also don't forget the tremendous tax advantages involved when you work for yourself, which your company is benefiting from instead today. though i am not advocating quitting your full time job - what i am conveying however is knowing what your time is worth, and i do realize the level of subjectivity that is involved here.

[Ryan]

Sunil, you know that $275 almost never happens. If you take an average collected rate for a senior I would guess it's a lot closer to $100. From what I've seen the breakout is usually 1/3 for salary, 1/3 for overhead (incl. company portion of health insurance, etc), and 1/3 profit for the owners/partners. I think it is pretty similar for lawyers. Good luck charging anyone even $100/hour as an independent CPA as a side income, or having the time to do it outside your required 3000 billable hours. Also, I'd be really interested in those tax advantages. Do you mean paying the self-employment tax? Because that's not an advantage in my book.

[First Gen American]

To me the main reason to start a side business if you already a high earner is if you want to downshift your life and control your schedule more.

Like the above commenter, my company prohibits one from having a side business that is in the same industry as I am in, so the only side gig I could do would have to be outside of my area of expertise. In that case, I'd likely make a lot less, at least in the beginning.

[Sunil from The Extra Money Blog]

@ Ryan - my experienced is in M&A, and never did partners bill under our bill rates. in fact, when M&A was hot and there was a shortage of us, there was discussion of increasing billable rates rather than charging more per head than the standard rate.

agreed that the more you make professionally, the harder it becomes to demand similar dollars on a per hour basis, and that is why i have opted to build long term businesses that generate passive and residual income. if you do the analysis based on NPV principles, the equation quickly makes sense. this is precisely why i do not work on the side on a per hour basis.

@ FGA - what a great point you make, and one that i'm completely with you on. money isn't everything for many people. in such a case, establishing a side business that allows the freedom and flexibility in the long term is a wonderful option, and one realized by many.

[Sunil from The Extra Money Blog]

@ Ryan - forgot to ask, you really don't think there are tax advantages to owning your own business net of self employment tax?

[Ryan]

You made the claim. You back it up. Health insurance? I'm assuming you wouldn't need that from a side gig. Business expenses? Okay, you can deduct them but you also have to pay them, so I don't see an advantage. Claiming personal expenses as business expenses? Probably not a great idea.

[Corina]

Great article!
There are perks to investing your time in side business of your own but essentially it all does come down to what is more important to you, spare time from work where you can relax, and spend quality time with family and friends or using that time to make more income.

[Sunil from The Extra Money Blog]

@ Corina - right on!

@ Ryan - from my experience it has been extremely rewarding. i do not advocate quitting your full time profession, so the health insurance aspect is not part of the equation.

you made a comment "Okay, you can deduct them but you also have to pay them, so I don't see an advantage". if you don't see the advantage in that, there is nothing further i can contribute.

you also made the comment "Claiming personal expenses as business expenses? Probably not a great idea." without a side gig, you pay your entire cell phone bill and deduct nothing. when you have a side gig, you deduct a portion of it depending on business use. your cash outflow doesn't change, but you benefit from the tax deduction. what's not so good about that?

[Ryan]

Sunil, if you have to spend an extra $50 on the side business to make $200, you get to deduct that from your income in that business for taxes. That is not an "advantage" over not having a side business, it just means you made $150 profit. If you think a phone bill makes up for the self-employment tax, I think you are mathematically challenged. Plus, who is to say you didn't have to increase the minutes in your plan for your business? I could still be a wash, as in the earlier example. I'm still waiting to hear some real tax advantages.

[Sunil from The Extra Money Blog]

Ryan,

Regarding taxes, read my discussion on what your effective income tax is with and without a side business. You seem to be stuck on the whole self employment tax aspect of the equation, so let's use your example. $200 revenues, $50 costs = $150 profits. 16% SE tax = $126 profits.

Have you heard of unlimited calling plans which many of us have? Whether you use 2 minutes or 2,000, your bill is fixed. Same can be said for several other day to day expenses which you incur anyway.

Now deduct a prorated portion of these bills from your profits and you are left with more than $126 in hand.

And you still do not see an advantage?

And now that we have moved past whether or not YOU see the advantages, I just realized that you completely missed the point of the article, and instead got stuck to the whole self employment tax concept.

Stop worrying about the minutiae and look at the big picture. I have learned over the years that the very same individuals that make comments such as yours as the ones who find limitless excuses for not getting started. Minutiae as I say . . .

I am speaking from first hand experience - so I suggest we continue the discussion based on concrete figures, preferably from YOUR first hand experience to be fair.

[Ryan]

Sunil, I have worked as a contractor making very good money. I took issue with several of your points because I think they are inaccurate and you should know better as a CPA. If you compare a salary of $200 to $200 you make as a contractor, you will take home less after taxes in most cases (7.65% FICA vs 15.3%).

You stated "also don't forget the tremendous tax advantages involved when you work for yourself, which your company is benefiting from instead today." The math just doesn't work. Will you have more after-tax money if you earn money with a side project than if you didn't do a side project? Yes, but I wouldn't try doing it expecting to save a lot on taxes, unless you are lying on your tax return.

I'm sorry, but your attitude with this statement strikes me like those late-night hucksters trying to sell people their systems for getting rich quick with no effort using secrets "they" don't want you to know about.

[Sunil from The Extra Money Blog]

The premise of the post is not to save on taxes. It is merely ONE discussion point within the post. You have not yet provided any concrete examples of why the math is inaccurate. Again, you just couldn't seem to get past minutiae (self emp taxes). But I am not surprised. Most people tend to do the same.

Moreover, none of this is a secret. I don't have a system I am selling daytime or night - I speak my experience, not theory.