In Rich Dad’s Cashflow Quadrant (our previous blog post here) book, it talked about the 4 elements of the quadrant: Employee, Self-Employed, Business, and Investor. Afterwards, we received quite a few inquiries asking for clarification on the difference between Self-Employed and Business, so we decided to dedicate this post to drill down on these 2.

Self-Employed

Our interpretation of Self-Employed, or “S,” or some referred as “SE,” is that you are the critical component of your business. Like in an engine, you are one of the gears and most likely the most important gear among all. In real estate, a classic example of self-employed is being a real estate agent.

As a real estate agent, even if you work under a real estate brokerage firm, you typically do not receive a salary (aka W2 income) from the firm, and your income is purely based on commissions receiving by buying or selling houses for your clients. You technically do not have a “boss” to report to, and you generally have full control on when you go to work and when not. You control your own destiny.

What you may notice in this situation is, although you control your own destiny, you are also your own destiny. This means you are the most critical component to make your gig successful. You are the person who have all the client relationships, drive them around for showings, write up the contracts… etc. While you have some level of flexibility to take an extended leave of absence (say you just want to disappear for a week for no reason), you can never be completely detached in this model because as a self-employed, the “self” (aka You) needs to be there. If one day you no longer can (or want to) participate in this gig, it will naturally fall apart and dissolve.

Business

Business, on the other hand, take Self-Employed to another level. In this model, you may still be a gear of an engine, but you may not need to be the most important piece of the gear, which the definition of “business”, or “b,” is that it runs with or without your active participation.

Using the same real estate agent example above, a way to transform it from “S” or “B” is to start your own brokerage firm. In that case, you hire your own real estate agents, provide a firm to represent them, and you are the broker + business owner. Yes, it is true that while you are ramping up the business, you more or less still need to actively participate growing it. But the big differentiator is, once the business stabilizes, you will not need to be in the office that often, or not need to be in the office at all, but yet the overall business’ productivity remains similar, and you make money no matter whether you are there in the office or not.

Combining S and B

You may see it as “transition” or you may see it as “combination,” but often times a “S” and a “B” is not so much a clean-cut so in reality we see more combination than not. Using the same example as before, when you have your own brokerage firm, there is nothing stopping you to actively participate as a broker agent, to continue buying and selling houses for your clients. You are still the business owner for your firm, getting a cut from the commissions that your agents make, but you are also an agent yourself (as needed).

That gets into another Rich Dad’s principles which is “multiple streams of income,” we will not go into details on that topic but you get the point. Once you get the ball rolling, it is quite possible to be a Self-Employed and a Business at the same time, making money both ways! When you need step away, you will only need to go away from the “S” side of things, and still enjoy the income being generated from the “B” side of things!