Since Nancy Halpern lost her job in human resources in 2008, she's been learning what separates those who succeed in self-employment from those who muddle through.
She's done well. A freelance executive coach in New York City, Ms. Halpern earns more than $250,000 annually, loves her flexible schedule, and takes six weeks of vacation each year. But several of her self-employed HR peers are struggling, especially those who've spent a lot to impress clients with rented office space and other accouterments.
"One had to lay off her administrative help during the recession," Halpern says. "Another was very price conscious when we went out to dinner, saying, 'What about a cheap pizza place?' "
As labor markets adjust to lean times, self-employment is an increasingly popular way to make a living. Before the recession, nearly 1 in 3 American workers was working for himself. Now, layoffs and the slow economy have pushed even more people to start their own businesses as writers, artists, electricians, shopkeepers, software programmers, and so on. They have no boss to please, no benefits (except what they buy for themselves), and no income if clients don't pay.
Success remains as elusive as ever, however. Even in good times, some 40 percent of the jobs created by start-up firms were gone five years later because those firms had disappeared, according to researchers at the University of Maryland and the US Census Bureau. Those striking out on their own must create work for themselves and manage the business dimension of their enterprise if they want to thrive.
"If you don't take on the responsibilities of being a business manager, then sooner or later you're going to have difficulties," says Gene Fairbrother, a Dallas consultant who works with the National Association for the Self-Employed.
Some reluctant self-employed people are having a hard time. Carlos Giron, a public relations strategist, has been freelancing since 2008 when he lost his six-figure job in Washington, D.C. Now living in New York, he's been unable to land a job with a firm. He's applied for a loan to start a company "properly" – with a rented office, administrative staff, and marketing budget – but no bank has been willing to finance him.
"My preference would be to find full-time employment," Mr. Giron says. "My second option would be to start my own business. But I don't feel confident enough, and I don't have the resources, to start my own business in the way that I would like to. [So] I'm in a very uncomfortable middle ground."
One trend evident among America's newest entrepreneurs: They're reducing risk. Recessions tend to generate lots of new one- and two-employee companies, according to the Ewing Marion Kauffman Foundation, based in Kansas City. Mo., which funds research on entrepreneurship. In 2009, new business starts reached a 14-year high but created fewer jobs than start-ups had in prior years.
"These could be profitable young businesses that are just going to try to grow responsibly and slowly, rather than risk everything," says Tim Kane, a senior fellow at the Kauffman Foundation. "It's all rational, but it does tell you that this time is different."
Some groups are adapting more easily to self-employment than others. Recent college graduates, especially in industries such as media that use lots of contractors, often assume they'll make their living by freelancing and cope with the labor market's vagaries, according to Sara Horowitz, executive director of Freelancers Union, a New York-based association that supports independent workers.
Men over age 50, however, often struggle because self-employment doesn't fit their long-held concept of what work is supposed to be.
For those who are self-employed by necessity rather than by choice, experts have a few survival tips. Remember "cash is king," Mr. Kane says. Plan conservatively and keep your overhead low to prevent indebtedness.
Mr. Fairbrother and Halpern recommend setting time aside regularly for business administration, such as planning expenses and following up on invoices, in order to make sure the numbers are working. And be selective about networking. Focus on people who really like you, Halpern says, because they'll want to help you succeed.
Self-employment is not for everyone, consultants say, and workers should think twice before hanging out a shingle. Fairbrother says to steer clear of self-employment if you need someone to lay out your day's work for you. And if you aren't passionate enough about the enterprise to crunch numbers at odd hours, then you probably won't do very well.
Halpern is one of those self-employed people who has absorbed the lessons of how to solo successfully in a tough business environment.
She prioritizes high margins by keeping costs down. She lives in the Bronx, where housing is less expensive than Manhattan, and runs her business from her living room. She doesn't use business software, but sticks with Excel spreadsheets and an American Express card to track cash flow. When a client needs her after 7 p.m. or on weekends, she's available because she's motivated by what self-employment offers her: ample time with her 15-year-old son.
"I love my son, and he's going to be gone soon," Halpern says. "This is the time I have for him. I know I'll look back and say, 'I wasn't a perfect parent and I made mistakes, but I was present in a way that I could not have been if I had not done this.' "