10 Steps to establish your consulting business
Here are the steps you can take to start your consulting business! It is easier to move to a new venture when you know how to get there. Following the steps in order will make it simpler to get started.
The good news is that you can usually establish your business before you leave your day job. Then you can begin consulting as a part-time activity until you have enough income to know that you will succeed.
Currently employed? It’s best to find out what your employers rules are for consulting or outside work.
Here are the 10 steps:
- Choose your path
- Choose a business structure
- Register your business
- Know your tax responsibilities
- Get a tax number
- Separate business from personal finance
- Establish an office
- Get online
- What about insurance?
- How much do I charge?
The steps focus on developing the infrastructure for your consulting business. Most consulting websites and articles concentrate on defining your niche and clients and do not address the business infrastructure. Certainly, your niche and your ideal clients are very important and should be considered as you follow the steps. You should also consider your brand.
Are you in the early stages? Perhaps you not yet ready to go into consulting or set up a consulting business? You can read articles in the blog for more information:
- Who can be a consultant?
- So you want to be a consultant?
- Learning about consulting
- Mentors can help you start and grow a consulting business
- An account of my own experience
If you have decided to move into independent consulting, see these articles:
- Standing Out From the Crowd: A Guide to Defining Your Niche as an Independent Consultant
- From unknown to in-demand: How to market yourself online as an independent consultant or freelancer
Now, back to the 10 steps:
1. CHOOSE YOUR PATH
“If you don’t know where you want to go, then it doesn’t matter which path you take.”
Lewis Caroll
Choose how much you want to be involved in the details of running your business. This will help in your choice of a business structure. Then you can register your business, address the financial considerations, insurance, and where you want to actually perform your work.
Let someone else handle business details and find clients for you
Some companies that support consultants and contractors will arrange the work, the travel, and the projects. Then you just do the work and they send you the check. You can pick and choose the jobs as long as you have enough work. In this case you devote yourself entirely to consulting. An example is Advarra. MBO Partners handles some of the business details and helps you find clients.
Let someone else handle business details, but find your own clients
An option is to join an organization that allows you to be an “employee of record.” The organization could handle all of the business, provide benefits, such as group health insurance, and do the billing, bookkeeping and taxes. So you would find your own clients and projects. An example of a company that provides such services is Solo Workforce for independent professionals. Agents and various companies will be happy to find work for you – for a fee, of course.
Establish your own business, find your own clients, and do the consulting
If you go with establishing your own business, you will first have to decide what business structure you will use. You can see that I did not mention every possibility, such as establish your own business, find you your own clients, and hire someone else to do the consulting for you.
Also, I did not address establishing your own business, and hiring others within your business to find clients for you and hire consultants to do that work for you.
In any event, you would need to choose the appropriate business structure whether you work as an solo consultant or hire others.
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2. Choose a business structure
The simplest business structures
The two simplest structures are a sole proprietorship or a general partnership. Simpler as you will see below is not necessarily better.
Sole Proprietorship
For a sole proprietorship, in the United States, check with your county government or state to obtain the details of registration. For a low risk business, where your advice or work is not likely to have substantial liability your might feel that this is just the structure for you. It is best to check with a lawyer, because as a sole proprietor, there is no difference between your personal liability and that of your business.
General Partnership
You could form a general partnership with a colleague who has complementary or similar skills. If the demand for your services is more than you can handle, having a partner could be an attractive option. The rate at which work comes in may be uneven, and your partner could step in when you are too busy.
You may even like to go on vacation without having to say no to new projects, or working through your “time off.”
Looks good, doesn’t it?
The problem, though, with general partnerships is liability. Because there is no difference between you, your partner or your business, it is even worse than a sole proprietorship.
Better business structures
“Life is about choices. The better you become at making good choices the better your life will be.”
Germany Kent
Get advice from a lawyer and an accountant sooner rather than later. An accountant can give important advice about your taxes, and whether a limited partnership (LP), a limited liability company (LLC), or a corporation may be best.
Limited Partnership
A limited partnership has two types of partners, general partners and limited partners.
The general partners are responsible for managing the organization, and can make obligations on behalf of the partnership. General partners are also liable for the partnerships actions and obligations.
Limited partners are liable to the extent of the money that they put into the organization, provided that they are not actively involved in the affairs of the partnership.
To avoid liability problems, the limited partnership can have a corporation or LLC as general partners. Forming a limited partnership that provides good liability protection is more complicated than forming either an LLC or a corporation.
The LLC tends to be favored in the real estate business. It is not allowed for certain organizations, such as banks.
Many consultants use the LLC, because it is easier to run than a corporation. Also, the LLC has less burdensome regulatory requirements and more flexibility.
Corporations
There are two main types of corporations of interest to consultants, C or S corporations. Other sorts of corporations exist, but may not be relevant, especially to solo consultants.
The individuals in a C corporation are taxed on their own income and the corporation is also taxed. This results in double taxation.
For S corporations, there is a pass through tax. The tax passes through to the owners. This results in single taxation. So the profits and losses of the S corporation would be paid on your personal income tax. Some states tax S corporations.
Unlike sole proprietorships or partnerships, the LLC, C corporations, and S corporations have good liability protection. But you have to carefully follow the regulations, including holding annual meetings. You should carefully separate your business and personal finances to avoid losing your liability protection.
For more information to help you decide about the best business structure for you, excellent information is available on the Internal Revenue Service and US Small Business Administration websites. Also, see this blog article about why it is important to register your business and some mistakes to avoid.
3. Register your business
Consider using an online registration service
You can register your business directly in your state on your own, and this is the least expensive way, initially.
A better way is to use an online service to file an LLC or corporation for you. The prices are less than lawyers’ or accountants’ fees, but try to find out more about the services before using them.
Examples of incorporation services are MyCorporation and LegalZoom. They may provide other help, including an outline of your responsibilities for the type of structure that you establish, example forms, and other services. Also, you can get advice from a lawyer using LegalZoom.
Whatever way you decide to move forward, registration is one of the important steps to start your consulting business.
Do you need a lawyer?
While many services can handle the registration of a business, this is not the same as having a lawyer. To find a lawyer, get advice from business associates or others you know.
You can also find a lawyer though performing a search online. Sites often can allow you to narrow your choices to business lawyers for your state or jurisdiction. For a general approach to finding a lawyer, see this American Bar Association (ABA) site. You might consider UpCounsel, where you can find lawyers for a one time issue or to advise you as a regular client. You can also find a legal help on websites for freelancers, such as Fiverr.
As you get involved in day-to-day matters, including contracts, you can obtain Legal Forms and general guidelines about what should be included in them.
It is good to have a lawyer check that the company has been set up correctly from a legal point of view and to review contracts.
Do you need an accountant?
Some people have an accountant register their business instead of a lawyer. Again, this is a more expensive option than doing the registration yourself or using an online service. You might try CPAdirectory or other resources to find an accountant. You can also try freelance sites, such as Fiverr.
Early on you should have an accountant check that your company has been set up properly, because this will help to avoid financial and tax problems down the line.
4. Know your tax responsibilities
In addition to understanding the legal implications of your business, it is important to know your tax responsibilities among the steps to start your consulting business.
You can receive tax advice and services from a Certified Public Accountant (CPA) or an Enrolled Agent. To be an Enrolled agent requires passing an Internal Revenue Service examination and a background check by the IRS.
The IRS has considerable information on your tax responsibilities and lots of helpful educational information and training for small business, including video seminars.
Also, the US Small Business Administration has free, useful information and links. It also has grants and other forms of assistance for small and startup businesses. It is well worthwhile taking a deeper dive into their sites.
5. Get a tax number
As soon as you have the documents from the state in which your business is registered, you should get an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). You need this even if you don’t employ anyone. In general, you will need an EIN to establish a bank account for your business.
Go the IRS site for Small Businesses and Self-Employed for more general information and for instructions to complete your EIN application online.
Soon after completing your application, you should receive a letter with your tax number.
6. Separate business and personal finances
Separating your business from your personal finances is one of the steps to start your consulting business. It helps to insulate your personal finances and property from liability relating to your business. It makes it easier to track your business finances.
First set up a separate small business bank account and obtain a business credit card. You could use the same bank as you have for your personal account, but set up a separate business account. As the banking industry keeps changing, it is worth shopping around for the best deals. It is also worthwhile looking for the best deals for credit cards.
While you can use paper or spreadsheets to record your finances, consider getting user-friendly accounting software. QuickBooks is widely used and training courses and experts online can help you get set up. If you have never used accounting software, it will need some effort to learn it.
Simpler bookkeeping and billing apps are available, such as Xero or Zoho Books. What you end up using depends on your business structure, and how much you want to get involved in managing the books and billing yourself.
While using accounting software does not require much knowledge of accounting, it is useful to have an accountant set up your initial chart of accounts. This is a listing of all the accounts of your business and is the way in which you would categorize all the money coming in and going out.
The blog has more information on setting up your consulting business to deal with money.
7. Establish an office
Another one of the steps to start your consulting business is to set aside office space in your home, and purchase the essential office furniture, supplies and equipment, laptop computer or tablet, peripherals, software, and mobile phone.
A mobile phone that allows you to see when calls begin and end is a useful feature for billing.
Scanning and emailing documents replaced faxes a long time ago, but you may find a client who insists on a response by fax. You could use a multipurpose printer with a fax function for this. Apps are available for producing pdf documents on mobile phones and pdf documents are often signed electronically.
You could get a landline or a voice over internet protocol (VOIP) telephone service. VOIP provides reasonably good sound quality, but may not be available during internet service outages.
A wireless hub feature with your mobile phone service or a stand alone hub or dongle is useful when your internet service is down or when traveling. It can be used to keep your computer online.
Verizon Mobile Hotspot Jetpack
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A small business account with Microsoft, Google or others is helpful for having your data on the cloud, security, software for email, word processing, spreadsheets, and presentations. They also provide ways to do video conferences, as does Zoom. Of course, there are other companies that provide these services and you need to find the best fit for your business.
Should you rent some office space to have a place where clients can visit you? It’s really not necessary. You can generally meet clients at their offices or elsewhere. Only rent space if you need it. For occasional needs, it would be more cost effective to rent space with companies that provide temporary offices as needed.
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8. Get online
Set up a website for your consulting service. The site should clearly explain what consulting services you offer and how to get hold of you.
Before you set up the site, obtain a domain name, for example, consultant-example.com. You can search for and buy a domain through: Bluehost. You could also buy domains through Wix, GoDaddy, Domains In Seconds or many others. Such services can also host the website for you.
You can set up a site for free without purchasing a domain by using, among many, Wix, GoDaddy, Squarespace, Google’s Blogger, WordPress, or other free blog sites. It is more professional, though, to obtain your own domain name for your website.
Many website hosting services include programs or apps that allow you to establish your own website without programming experience. The blog has more information on website hosting. You could also find someone to put up a website for you at low cost using freelance services such as Fiverr, Guru.com or UpWork.
A website can also allow your clients to pay you online using PayPal or an online merchant’s account.
Getting online is one of those important steps to start your consulting business, because it gives you a wider presence and is an opportunity to brand your services and provide a way to find you and learn about your services.
9. What about insurance?
For some people, getting insurance may not be top of mind as one of the important steps to start your consulting business. Your insurance needs will depend on the types and level of risks in your area of consulting.
As a rule, your business will require general commercial insurance that is inexpensive, and errors and omissions (malpractice or professional liability) insurance. Errors and omissions insurance can be costly, especially if you are in a field with substantial risk exposure. See Investopedia’s article, “Best Small Business Insurance Companies: Find the right insurer to help protect your business.”
As an independent consultant or contractor, you will need to get your own health insurance, unless you are already under someone else’s insurance. It will cost more for individual health insurance than group insurance you may have had when working in someone else’s business. Some people deal with this by using a higher deductible.
Visit eHealth to get an idea of health insurance costs. You can enter the state where you live, and other information about the insurance you are seeking to get instant quotes. Through this you can, for example, get an idea of medical, dental, and vision insurance for yourself, your spouse, partner or family. The quotes cover a number of insurance providers.
You may also consider getting your own life insurance. Term life insurance is relatively inexpensive.
10. How much do I charge?
“Strive not to be a success, but rather to be of value.”
Albert Einstein
Start by figuring out what you would charge per hour.
You can charge for your services in different ways: by project, using an hourly rate, on a retainer, or other methods, but the hourly rate is a useful starting point.
Don’t look at your salary and go by your hourly pay.
At your job you do not have to spend half your time looking for work.
A 40-hour workweek, and working 50 weeks a year (only two weeks for time off, including vacation and sick days) would give you 2000 hours a year to earn a living. Until proven otherwise, you can count on spending 1000 hours a year looking for work, writing proposals, billing, and other activities that do not bring in any money.
You will need to pay for benefits yourself, and you will have overhead expenses.
As an employee, besides receiving a salary, you may have health, life, and liability insurance at a group rate. Some companies offer a retirement plan, such as a 401K, and may match your contributions up to a certain dollar amount. This would be extra money for you. Then there is paid time off. Your employer may offer and encourage training, and pay for you to attend industry or trade conferences. You have a work space and they pay for equipment, such as computers, phones, printers, software, supplies such as stationery, and other overhead expenses. Consider these expenses, and how much you will need to earn to pay for them.
You may need to charge at least 2 and a half to 3 times the hourly amount you would expect to earn in a regular job.
This is because you may only be performing billable work about half of the time and you will be paying for your own benefits and expenses, This is not a fixed rule, because you can only charge what a client is willing to pay. Ask around and research for yourself what most consultants are charging in your area of work.
With experience you will learn what to charge and the best way to charge.
If you are able to make the transition, while you have a job, you will have a better grasp on what your cost of business is likely to be. You will also learn over time while independently consulting how much you need to charge and how much people may be willing to pay you for your services. You may find that other ways of charging, such as by the project, may work better for you, and these are addressed in the blog.
The blog has more information about how much you should charge.
Now it’s up to you to take the steps to start your consulting business!
“The only thing worse than starting something and failing… is not starting something.”
Seth Godin
Take the first step. Follow the steps in order to set up your business. Use what works for you and move forward.
For more about establishing and growing a consulting business, visit the Home page and blog.
Please leave comments.
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