For those thinking of going it on their own as a contractor, freelancer, solopreneur or small business owner, one of the major keys to success is having your financial house in order before taking the leap. Having a limited amount of funds available for the early days of the solo-business journey can leave you sweating it out or forcing you to jump at the first in-house gig that arises. 

But what you need to succeed may not be easily understood or realized, especially if you’ve never had to run your own entity before. To help with this process, I’ve created a little checklist that you can use to ensure you have what you need in place, before stepping away from the job. 

This might not cover everything for your individual purposes, but it does provide a general list that one should consider before taking a leap by going out on their own. 

• Test Whether You Like Working Alone – Becoming a solo business owner can often be a lonely exercise. If you can’t handle working by yourself for days on end, it will be tough to survive. Test working on your own while in a day job by working from home or taking a ‘vacation’ where you do some freelancing. This will help determine whether you can handle isolation during the work week
• Analyze Spending – Figure out where you can cut costs to help with the initial launch of your business. While you may have some clients lined up, it will take time for everything to click. Reducing your spending heading into solopreneurship will allow you to realize a profit faster
• Analyze Earnings – How long it takes for you to find a client, do the work and then get paid will differ based on industry, skillset and client. But you need a sense of how long it could take, since that will determine when you earn income. Understanding this will help determine things like emergency funds and your break-even point
• Determine Your Pay – What, based on your expectations from clients in the early days, do you expect to make on a monthly basis? What do you expect to need? Use these two tools to figure out how much to pay yourself each month. Instead of sapping everything you make, you should determine what you need and only pay yourself that amount. The rest can go towards retirement, taxes or an emergency fund, to ensure you have pay for more lean times
• Build an Emergency Fund – Using the spending and earning parameters defined previously will determine your emergency fund. How much do you need to pay yourself each month to cover costs? Having six months in a fund that you can easily tap will ensure if payments are slow, you still have funds to pay yourself and bills. This reduces credit risk
• Figure Out Healthcare – If you’re married and can use your spouse’s coverage, that’s often the best option. If not, then you will need to shop around for coverage that you can afford and that will give you quality care
• Select a Business Structure – Creating a structure, like an LLC or S-Corp or another form, will reduce your liability but also give you significant control over how you will pay yourself, save for retirement and reduce taxes. It’s a key tactic to cut costs, one that can also protect you from lawsuits even if it’s limited
• Figure Out Disability and Other Insurances – Long-term disability is among the most important needs for solo business owners. Since you’re completely reliant on your ability to work for your income, having protection in case you can’t work is vital. For some professionals, you’ll also need to have certain insurances to protect from liability, like errors & omissions or malpractice or another specific to your industry
• Plan Your Taxes – Instead of paying every paycheck, you will pay estimated taxes on a quarterly basis. Plus, most of the time, you will also be paying the portion of the Medicare and Social Security taxes that your employer would have paid for you (if you had an employer). Planning for this will prevent surprises that can defeat your momentum
• Select a Retirement Account – You should still strive to save for retirement, even if you work alone. This not only protects you long-term, but also provides some much-desired tax reduction. Understanding this from day one will ease the pressure to incorporate it later

This checklist will give you a big leap, financially speaking, as you seek out those first few clients. Then it’s about managing this process on a regular basis, so you can shift from surviving as a solo owner to someone that thrives.

If you liked this post, consider checking out the Thinking Solo newsletter or Contact Us directly to discuss further.