Too safe to go, too poor to stay - to open a private consulting business or not?

August 4, 2011 12:51 PM

Has anyone ever regretted leaving a stable IT job with a pension and good benefits to consult in private industry?

Scenario:

A person has been at a stable government position for many years - just under the threshold of being shackled by 'golden handcuffs'. Now, they've been offered a substantially higher $/hr rate by a large multinational - only if they become a consultant who has their own incorporated company. The contract term is renewable annually, and they typically renew their consultants contracts without issue.

Has anyone ever left their stable job for the risks of consulting?

Does anyone regret it?

What would you do differently?

What mistakes have you made?

posted by burhan to work & money (20 answers total)

1) Health Insurance
2) The economy is in the shitter.
3) Never take a contracting firm at its word. The government almost always makes good on its obligations. Contracting firms rarely make obligations.
posted by schmod at 1:11 PM on August 4, 2011

I've taken some risks in my career, but in this economy I think I'd be inclined to stick with the stable government job. Your personal situation plays into the decision though. If you are single with low overhead, maybe it's much easier to take the risk. If you are married with two kids approaching college age - you probably stay where you are.
posted by COD at 1:22 PM on August 4, 2011

Has anyone ever left their stable job for the risks of consulting?

Well, yeah, people do this all the time. I have several friends who have left company jobs and gone out on their own as consultants; some of them have a sort of cyclical thing where they consult for a while, then go in-house for a while, etc.

While the $$biggerhourlyrate$$ might look bigger on its face, break down your current pay - don't forget to include whatever your employer pays towards your health insurance (group is almost always much cheaper than individual), puts toward your pension, and so on. Does that proposed $$bighourlyrate$$ cover all of that?

This does seem like a risky time to do this, unless you get a contract clad in iron, and then some.
posted by rtha at 1:25 PM on August 4, 2011 [1 favorite]

Two potential problems: overwork and underwork. In the former case the money comes rolling in but life is stressful. You may have only limited options to work forward and backwards in time. You will probably have limited options to delegate - certainly while retaining the same level of income.

In the latter case you have (often much needed) time to relax - probably more than you would get in a regular job. But without a pay cheque!

If your temperament and financial position allow you to thrive on stressful deadline AND not worry too much about periods out of work then that would be my best indicator that you might want to give it a go.
posted by rongorongo at 1:44 PM on August 4, 2011 [2 favorites]

One smaller issue to consider: accounting costs for a corporation. A recruiter at an agency once said to me, "oh, by the way, you'll have to incorporate to get this contract job--that's how we do things, it's nothing, you can do it online in a few minutes." It ended up being thousands of dollars a year in accounting fees for the corporation's income tax filings and other paper work. The agency's motive is to obscure the fact that you're really more of an employee than a contractor: you come in 9-5, work in the office, etc. The government doesn't like the fact that companies are getting around paying payroll taxes by calling people 'contractors' rather than an 'employees' and have started taking measures to crack down on this. Incorporating is a subterfuge that covers the agency's ass to some extent, making the relationship appear slightly less sketchy, at least on paper. (This is in Canada; I'm guessing this applies elsewhere but don't know.) From the perspective of what's best for you as an individual freelancer, there are cheaper and simpler ways to go than incorporation.
posted by Paquda at 1:47 PM on August 4, 2011

Paquda makes a good point, one that's worth clarifying with the entity whether he must actually form a C- or S-corporation (expensive and really fussy for one person), or if an LLC or sole proprietorship is adequate. Still, I strongly recommend getting a tax accountant if he goes that route; ours costs us several hundred dollars a year (between Q&A, paperwork, and the actual quarterly tax prep) but it would cost us like five times as much in time spent puzzling this crap out.

It's definitely a no-guarantee proposition, as any invoice- or billing-based work is. They could simply stop paying at any moment. If he has skills that might be interesting to other customers as well, that lessens his risk if he's capable of marketing himself to them.
posted by Lyn Never at 2:38 PM on August 4, 2011

I've done this. Make sure the hourly rate is approximate double what you're getting right now, otherwise you'll lose out.

Get health insurance arranged before you quit.
Make sure your company is setup before you quit.
Plan on saving at least 1/3rd of all income to pay taxes at the end of the year.
If your contract is up for renewal, start looking for your next contract a few months before it ends. I've known many people that had a "guaranteed" renewal fall through a day before the end of the contract with no backup plan.
posted by blue_beetle at 2:39 PM on August 4, 2011 [1 favorite]

Oh, and budget $1000/year for tax preparation and accounting fees. You might not need that much, but it's not uncommon.
posted by blue_beetle at 2:40 PM on August 4, 2011

Here's a little tip: If the value of what you know is of much greater interest and economic value to a C-suite person, than an accounting clerk, go for it. Otherwise, in this economy, don't.

If your knowledge of the software or platform on which you'll consult is so broad and defining that you'll have no trouble getting meetings with new clients at that level, or billing consulting hours to projects directly sponsored by such C-suite folks, and if you'll be reporting to them as clients, primarily and frequently, jump. You'll be a big success, and within maybe 5 years, your travel schedule will be reasonable, and you can offload some of your direct involvement to well qualified underlings, who you massively overpay, for the simple mercy of not having to fly out, again on a Sunday night.

Otherwise, stay put, and get really smart about your 401K, your IRAs, and your investment portfolio.
posted by paulsc at 2:55 PM on August 4, 2011

Note that the hourly rate doesn't guarantee the number of hours you'll get. It's very rare that you will be working a straight 40 hours as a contractor or consultant. Typically you'll either be working 80 hours/week or, like, 5.

And if you ask the prospective employer, please note they will probably not give you the true answer. Not out of malice, but just because they honestly never seem to know ahead of time.
posted by ErikaB at 4:14 PM on August 4, 2011

A couple of things:
* You will have to get private health insurance. If you have had anything go wrong, ANY kind of health problem, there is no guarantee that you'll be able to get insurance at all. Find this out before you jump.
* If you're like most government employees, you work 40 hour weeks. Maybe this is a special circumstance, but as a consultant, and especially as an IT consultant, someone else may set your deadlines without regard to the actual possibility of you getting the work done. Depending on your role, you may be working 80 hours weeks and/or get called at 2:00 AM three nights per week. You won't get overtime, comp time, paid holidays or paid vacation. I've seen consults where holidays are completely ignored.

You will make more money, and as an hourly employee, if you work a lot of hours, you'll make A LOT more money. However, make sure you fully understand the expectations, your role and the tradeoff. It can be a culture shock otherwise.
posted by cnc at 4:25 PM on August 4, 2011

I think from your previous posts you are in Canada? You need to know the incorporation options, pension, insurance and tax implications. An exploratory appointment with a tax attorney might be in order.

In addition, your posts indicate you have sole custody of three school aged children. This ups the risk factor in case of non-renewal. There are also potential insurance implications for the children. It is also absolutely essential that you clarify any travel requirements because arranging care for the kids can be both complex and costly.
posted by DarlingBri at 5:13 PM on August 4, 2011

Some excellent points for sure:

As far as health insurance, I was going to set up with Alberta Blue Cross as my option. Thank you for the advice of having that set up before anything happens.

Incorporation: Yup.. there are a few ways to do it in our province.. a) I do it through a registry -> this costs ~$450 and doesn't do much for me other than give me a numbered company. b) I do it through a lawyer -> ~$2000 - this gets me all set up for incorporation, with a company name, but does not let me expense 'sweat equity', and c) I do it through an accountant - somewhere in the middle of a and b, and is set up so that I can expense sweat equity, plus they then manage my tax payments and set me up with all the logbooks/ledgers/etc. that I need and coach me through this.

Taxes:

* In Canada, my company would have to pay revenue canada every month else you have to pay a $400 penalty.
* My company would be cutting myself cheques, with CPP (canada pension plan) contributions and federal tax deducted, so I wouldn't be hit with that giant personal tax bill at the end of the year, and I'll be having money set aside for corporate taxes (based on net profit here in Canada).

As far as taxes and paperwork goes, most accountants seem to want receipts every 3 months. They sort them out and decide what is legit or not - I just write what they are for on the back.

Economy: Our economy is starting to pick up here - our economy is mostly oil and gas, so I'm not worried about that. Where I work is typically 3 years behind what the private sector sees - we're just doing layoffs and cost reduction this year, where other companies in our province seem to be doing well and hiring...

Pension: I have a brilliant pension where I work. I will have to forego the regular contributions for some time until I get my debts paid down enough that I can give this more serious thought.

I think I'm freaked out over the whole prospect of:

a) leaving some good friends behind at my old place
b) not knowing *for sure that I'll have a job next year (to be honest, there is no "for sure", even in public service, as we just had massive layoffs)
c) and having to really rely on myself to support my family instead of knowing that work will be able to pay me regardless of what happens.

"What if I stuff everything up by doing this?" is the underlying fear.

It's really scary, but it just feels like the right thing to do. The extra cash, even the 1st year alone, would reduce my debt load by a substantial amount without a noticeable change in our standard of living - there is no way with my current job that I'll be any further ahead in 3 or 4 years at this pace.

Hours: They told me it would be busy and it's a fast paced environment for sure. The inability to book double time for overtime is depressing for sure. With the family, it's so important to be available. I definitely feel that this will be my sacrifice for sure.

I will definitely clarify the hours with them for sure.

I've been risk averse for so long in my life, and it's gotten me so far. I'm also a bit scared that this may be the last chance to really take a bold career move that actually makes a difference and gets me financially ahead.
posted by burhan at 7:44 PM on August 4, 2011

If you choose to do this realize that you will need to establish a new or much larger cash savings account/emergency fund. Investment accounts don't count - this needs to be totally liquid cash, and 6 months living expenses is a minimum (ideally 12). That should be easily done in the first year of the new job with the increased pay, and should be done BEFORE paying down debt. I know that sounds counter intuitive but once you've paid debt the cash is gone and you can't get it back without taking out a new loan. If an emergency or time out of work occurs that is exactly when a loan will not be available to you.

Secondly - in my experience employers use generally use contractors for a few reasons. These are the same reasons that contractors get more $$$
- the role has a limited or potentially limited time frame/ or long term funding uncertain
- there are tasks they can't or won't ask employees to undertake, such as regular excessive overtime or travel
- the position requires specialized skills and they don't have structure or knowledge to support an employee
- there are performance liabilities they want the contractor to be responsible for (read as unacceptable risks)
- they have a rigid internal salary structure and can't find/retain a person in the role within that structure (this sounds silly but I have seen it firsthand)

Consider why it is that a "large multinational" needs to contract this role. Ask them why it is contract and not permanent. They may tell you or they may avoid the question, or just lie. Either way you'll have something else to work with.

And by the way - double time pay for overtime is for union and low-paid workers. You'll already be getting paid "double time" for every hour compared to employees and overtime is gravy if you can handle the hours.
posted by kgbrion at 1:29 AM on August 5, 2011

I am a government employee. IF you have a real pension then i would say keep your job. Where i work if i were to leave and come back I would lose my pension tier. Some states had pensions and got rid of them so if you quit and come back you would also lose your pension.


So IT would be a more money now if you contract or more money for retirement if you stay where you are.

Its your decision but if you have a real pension keep in mind you could lose it if you quit (meaning if you want to get a new government job down the road you would not be able to reget your pension ).
posted by majortom1981 at 6:44 AM on August 5, 2011

Didn't realize you were in Alberta (I am too). Don't worry about getting health insurance, Blue Cross doesn't offer much more than Alberta Health does (except for dental and optical).

You might need to look into Errors&Omissions insurance. If you find your contracts through a recruiter, they may include this, but if you're on your own you might want to look into it.

If you're looking for a decent accountant that specializes in IT consultants, I have used (and would recommend) CA4IT.
posted by blue_beetle at 8:36 AM on August 5, 2011

Also, if you're the sole owner of shares in your incorporated company, you don't need to pay CPP or EI, as long as you structure your company so that you pay yourself in dividends rather than salary. Your accountant should be able to cover all that.

Make sure you register for GST as well.
posted by blue_beetle at 8:37 AM on August 5, 2011

I have done this in the U.S. I left a comfortable salaried position to start consulting. I had the benefit at the time of a wife with health insurance I could go on. I nearly doubled my income right from the start -- I started as a W-2 employee of a recruiting firm for Company A. After 6 months in the contract, the client renewed and I asked for and received a higher rate. The same again 6 months later. Things got slow there so I jumped on another contract at Company B paying $10/hour more than my previous contract. That one ended and they didn't renew.

As luck would have it, Company A was merging and moving out of state and they needed someone to help with the transition. Rather than go through the recruiter again, I formed my own company and we did a corp-to-corp contract for a significantly higher rate. But that only lasted 4 months. Then I scrambled to find another job.

As luck would have it, a recruiter for Company C offered me a contract at a comparable rate. After 6 months, the IT job market had dried up and Company C offered me a direct position at HALF my pay. I felt I had no choice so I took it.

My company was a S-Corporation. I could have just as easily done an LLC, but at the time I thought a corp sounded more professional. I read about how to incorporate and got some advice from an accountant. I paid myself a small salary and then took "capital distributions" from the corporation that were taxed at a different rate. I setup a SEP-IRA for retirement savings. With my accountant, I filed quarterly tax returns. I purchased a $1 million liability insurance policy.

If I had lost the contract at any time, I believe I would be out of luck for unemployment benefits. That was the major potential downside to me -- the downtime between gigs. In hindsight, I wish I'd refused Company C's offer and stuck doing contracting, finding another gig elsewhere.

One last thing -- when I was making tons of money, I happily took all sorts of unpaid vacation because I figured I could afford it. Probably I should have worked as many hours as I could and socked away that money for a rainy day.
posted by indigo4963 at 10:57 AM on August 5, 2011

Blue_Beetle, funny you should mention the dividends. I spoke with a consultant friend the other night and he said the same.

I have found a great accountant who will be helping me structure my finances so that I can save enough for a rainy day, meet my obligations (mortgage, utilities, fuel, insurance, etc.) and pay down my debt. We're drafting quite a good monthly plan for it.

Everyone had great advice. Thank you so much!
posted by burhan at 5:27 PM on August 5, 2011

It occurred to me that you need to be wary of an agency that tries to aggrandise the job of "contractor" with the label "consultant"; they are kidding you and possibly themselves. You also need to work out whether your agency is actually one that is set up for consultants rather than contractors.

Those people who are in true demand as consultants have not only a depth of technical knowledge but also a breadth of experience in applying it to a range of businesses. Moreover they will be great communicators, very quick on the uptake and adept at networking, persuasion and self-promotion. Consultants will tend to be employed by people at, or very near, the top of an organisation. They will often work for quite short periods for an organisation: just a few days to provide some strategic advice or "train the trainers" for example. For this reason they may have a higher day rate than contractors.

Contractors, by contrast, are more likely to have worked for longer periods of time in fewer places. They probably report to somebody a little further down the hierarchy. They may simply be people who have traded less job security for more cash within the same organisation.

Both groups are well remunerated - but consultants tend to have much larger networks for finding new work. Both may also work through an agency - but the agencies need to be talking to the people who will be paying the bills. A good consulting agency needs to be on the short dial of people running companies (expect it to be run by a consultant rather than a recruiter). Ask them about their corporate contacts and about recent work they have placed. Ask them about the work patterns of those who did that recent work. Can you talk to some of these people as references?

Spend some time considering the motivations of the agency too. A contracting agency is often mainly a provider of temporary workers to a corporation. They earn commission from the work you do for this company - but because they have many people working for the same corporation their loyalties are more likely to lie there rather than with you. Consulting agencies are more like actor's agents: they have a number of people on their roster that they promote as stars. They make money by ensuring their clients work on the most prestigious, best paying movies (with the fewest gaps in between engagements). In public their promote their stars as great; in private they council them on how to get better. They spend a significant portion of their time cultivating their industry contacts but they also excel in doing grunt work, such as invoicing; this allows their clients can concentrate on "their art". All this costs a little more than would be the case with a contracting agency. Most clients of a good consulting agent would agree that they are worth every penny. If you want to be a consultant, and you choose to use an agency, then make sure it is this second type.
posted by rongorongo at 1:50 AM on August 8, 2011