How to start a Consulting Business

Before you decide to start a consulting firm, there are a few legal concerns you should be aware of.

Starting a consulting company has a specific set of legal issues. Choosing the right company entity, acquiring licenses and permissions, dealing with tax difficulties, creating policy statements and contracts, obtaining appropriate insurance, and dealing with workers are just a few examples.

Keep in mind that "consulting business" can refer to a variety of activities. Some consultants work primarily in their own offices, while others work in other people's offices or on project sites, both indoors and outdoors. Furthermore, some consultants are "professionals" in some legal senses; for example, they may be licensed by the state. Make allowances for your specific type of consulting as you go through this text.

Choosing the Business Entity

You may be able to operate as a sole proprietorship or partnership, depending on the specifics of your consulting firm. You should, however, think about selecting a legal structure that protects you from personal culpability. If you are a member of a recognized profession, you have extra alternatives, such as a professional corporation or professional limited liability company, in addition to the more usual ones, such as a limited liability company or corporation..

In many circumstances, consulting work may not appear to be particularly hazardous, and personal responsibility scenarios may appear improbable. However, if you are in charge of important data, physical property, or even specific persons, you may be exposed to the danger of anything being destroyed or lost, or someone being hurt. This may happen at your own business location or somewhere else, but in any case, you want the company to be accountable for any liabilities, not you personally.

Licenses and Permits

Even if you operate as a single proprietor, you should consider getting a federal tax identification number, often known as an Employer Identification Number (EIN); an EIN is required for other legal types of company. The procedure is straightforward and may be performed entirely online at the IRS website. Furthermore, even if you work as a single owner, you may be required to get a general business license from a state or local government agency. If your consulting firm will operate under a name other than your own, for example, you may need to file a "doing-business-as" (DBA) certificate (also known as a fictitious business name certificate).

In addition, each state requires state licenses for at least certain vocations and professions, ranging from conventional professions like physicians, attorneys, dentists, and accountants to occupations like barbers, cosmetologists, real estate agents, and insurance agents. Before putting yourself up as a consultant, be sure you hold the necessary professional or occupational licenses.

Most states need you to get a sales tax permit for the sale of most products if you will be selling things as part of your consulting firm.

Finally, even if your consulting firm is "low-key" or office-based, local zoning regulations may restrict your firm from operating in some areas. If you plan on running your business out of your house and live in a plainly residential, rather than commercial, neighborhood, this is more likely to be an issue. Even if the business is permitted under the local zoning code, you may be needed to get a zoning compliance certificate. In summary, before you begin for business, you need to look into zoning restrictions.

Health and Safety

Health and safety are unlikely to be a top priority for office-based consultants. If you will be working "in the field" in potentially dangerous situations, such as construction sites, or if you will be working with hazardous materials in any way, you should research federal OSHA and EPA regulations, as well as your state's occupational health and safety and environmental regulations.

Tax Matters

Depending on the legal structure of your firm, your tax status will be different (corporation, professional limited liability company, partnership). You must attach a separate schedule (Schedule C) to your personal income tax return, even if you are a sole owner. You'll have to work with whole new tax forms in more sophisticated structures, such as a S Corporation or a multimember LLC. If you're used to working as an employee, this extra degree of complexity might be perplexing at first; in which case, hiring a skilled accountant may be a smart investment.

Self-employed consultants are the most common type of consultant. If you're leaving a job, you'll have to deal with a new tax form issued by customers that pay you for your services: IRS Form 1099-MISC. While there may be certain exclusions based on your business's legal structure, you should be aware that as a self-employed person, you will be liable to the federal self-employment tax. With this increased tax liability comes the necessity to make quarterly estimated tax payments; IRS Form 1040-ES contains information and instructions on how to make these payments.

Your status as an independent contractor is another problem that is sometimes lumped together with tax concerns. The word "consultant" may make you think you're a freelancer rather than an employee. However, it's a good idea to study the IRS's independent contractor rules, which are included in IRS Form SS-8, as well as any parallel state guidelines that are accessible.

Finally, you may be eligible to claim a deduction for business use of your home if you conduct your consulting firm from your house. IRS Publication 587 explains how to calculate the deduction in detail.

Insurance

Appropriate insurance for a consulting firm will differ based on the specifics of the company. Even if you plan to work primarily from home, you'll need appropriate premises liability insurance in case a customer or other business-related visitor slips and falls or is harmed in any other way at your place of business. You'll also want appropriate property coverage for your actual company equipment, as well as insurance for the loss of your personal data. Professional liability insurance should also be thoroughly considered – or may even be needed – depending on your field of competence.

If you'll be working in settings that are plainly physically hazardous, you should check into personal injury insurance, both for yourself and, if required, for others. Similarly, if you'll be driving between job locations, you'll want to be sure you've got the right insurance.

You may discover that working with multiple different insurance agents with different areas of experience is necessary to receive the greatest information and coverage. Look for agents that have written policies in the areas that are important to your business. If you'll be advising on dangerous chemicals, for example, look for an agent who is familiar with hazardous substance coverage.

Policy Statements and Contracts

By its very nature, "consulting" is usually a very flexible company, and various customers may want somewhat different services from you; as a result, you may be interested in meeting these varied demands. While you don't want to limit what you may offer potential clients, it may be in your best interests to create and give broad principles about how you work in advance—and in writing. You might consider putting your policies on your website if you have one. Whether or not you have a website, you should develop a printed document including basic policy information that you provide to each of your clients before you make any agreements or start working.

Depending on the type of consulting you provide, general policy components may differ significantly. Billing issues (whether you bill by the job or by the hour; any minimum charges or hourly billing increments; how you charge for travel time; whether you bill bi-weekly, monthly, or only at the end of a project), payment issues (do you take retainers; do you expect monthly or other periodic payments), and who pays for certain expenses are just a few examples (such as special equipment, airfare, or hotels).

The unique agreements you establish with each individual customer are at least as essential as generic principles. These should ideally take the form of service contracts that describe a variety of issues, including those already stated (invoicing, payments, and costs), as well as the specifics of the job you are required to complete.

Remember that in order for a contract for services to be legally binding, (a) you and your client must agree on what the contract is for (a "meeting of the minds"), and (b) there must be an exchange of value (also known as "consideration"—in the case of a consulting business, usually the exchange of your services for money from your client). If the services will be finished in less than a year, the contract does not need to be in writing; nonetheless, most consultants will not provide services without first receiving a formal, signed agreement. In fact, you should consider creating (or having a lawyer create) a standard contract that you may customize for each client.

Employees

If you plan to hire people, you should educate yourself on fundamental employment law topics including illegal discrimination, workers' compensation, and how to conduct the recruiting process. Learn how to do the following when it comes to hiring:

• create a useful job application that does not include illegal questions
• check references or make other preemployment inquiries -- again without violating privacy laws or otherwise seeking illegal information, and
• ask interview questions that are both useful and legally permissible.

​​​​​Yoel Molina, Esq. (AKA “Mo”)

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