Preparing For The Plunge: What Changes When You Move From Employee To Entrepreneur

The thought of starting something on your own might have crossed your mind at some point or the other. The stories surrounding the leap of faith either turn out to be those of dazzling success or difficult downfalls of these ventures.

Clearly, the jump is not for the faint of heart and there are a lot of things that need to be considered, including one's bank balance. If you have actually decided to leave behind the suffocating job and become your own boss, there is a whole host of changes that accompany a move from being an employee to a self employed individual.

Far from the monthly pay check, starting a business or a company may not only demand high costs for setting up, but will also take longer to deliver expected returns.

"The income will not be as regular as before, even if you have a fixed consultancy contract. It is important to prepare a buffer amount of money, ready to take care of the irregularity in income," said Arnav Pandya, founder of Moneyeduschool.

"One needs to keep a check on expenses till you get to stable income," he said. To take on and tackle the initial costs of starting off, dipping into savings makes for a better bet than taking a loan.

Notably, though there is a change in income, most expenses remain the same.

"There are some expenses which cannot be done away with, like medicine, fees, insurance along with others," said Amol Joshi, founder of PlanRupee Investment Services.

Someone transitioning will need a year to 18 months worth of expenses in their emergency fund, according to Joshi. The requirement of an emergency fund becomes even more crucial due to the uncertainty of income itself.

There may be a lot of one-time investments that need to be made in the process of setting up a working system.

"These first time investments can be made with savings. It is growth and expansion that calls for credit or loans and not set up," said Pandya.

While taking a loan will give the setting up a head start, the interest and monthly EMI payments might be difficult, especially with an inconsistent income. Loans will also introduce the risk of penalty in the case of defaulted payments.

In cases where a business or a company is started along with others, it is important to establish clearer lines on personal and company finances. It is best to have a compensation system or a profit sharing ratio in place as soon as possible, Pandya said.

"Most people end up looking only at the happy side. When you start a business, every problem becomes a personal responsibility as you lose the invisible support that an office provides," he said.

As far as tax changes goes, there is a change in structure and deadlines for self-employed individuals. It is important to take time and understand the system in place before taking on the change.

The net amount after the outflow of genuine expenses are taxed, said Pandya. This means that one needs to ensure that all the proof of all expenses and transactions need to be documented.

For self-employed individuals, there are certain allowances and a separate tax structure itself that is set in place. There are certain allowances for assets, depreciation and expenses and others.

As the income lowers and expenses grow, tighter budgets may allocate little space for investments. A changed outlook about investment should not be at the cost of compromising on later goals in life.

"Try and keep going with investments. If you do pause the investments have a plan to start back so that investing goals remain intact," said Pandya.

Putting SIPs on hold can also be used to create some breathing space for the change to settle and then can be continued without further delay, said Joshi.