This post is for informational purposes only and is not legal or financial advice. You should always consult a qualified attorney, accountant, and/or tax advisor before making these kinds of business decisions.
Being an independent business consultant means being your own boss, selecting the projects you’re the most passionate about, and setting your own schedule. But being a smart independent business owner also requires understanding how to set up a consulting business for success.
As the sole owner and operator of your independent consulting business, it’s up to you to figure out how to grow a consulting business by finding your next new project and marketing your capabilities to the appropriate audiences. You’re also responsible for juggling the day-to-day operational needs of your existing clients and carving out the time to do the work you’ve been hired to do—and do it well.
In this blog post, we’ll explore how to set up a consultancy, covering key topics like how to navigate networking, insurance, and how independent consultant taxes are influenced by the structure of your business.
What is an Independent Consultant?
Before we dive into the details, it’s important to define what an independent consultant is. By definition, an independent consultant is an individual with extensive specialized expertise who works for themselves or executes work as part of a small team and is not directly employed by a company. Consultants may work in an advisory role or a more hands-on capacity with work in a wide range of industries, from marketing to technology to healthcare. They may offer services such as strategy development, project management, or technical expertise.
As such, when you are an independent consultant you are essentially operating your own consulting business. This can be both exciting and overwhelming, so it’s important to go into this career path with a clear understanding of what you’re getting into as you set up your business consulting services.
Now that we’ve defined our terms, let’s get into the logistics of starting a consulting business. Here’s your checklist:
1. Define your business structure
The first thing you’ll need to do when starting your own business is to decide on what the legal entity for your business structure will be. It’s important because the choice you make here will determine how you manage your taxes and how much personal liability you could assume in the event of the failure of your business. Each comes with its own pros and cons so it’s important to weigh out the advantages and disadvantages. Ultimately, this decision will be guided by the nature of your business and your vision for how it will grow. Depending on your industry and location, you may need to obtain certain licenses or permits to operate your business legally and so it’s important to consult with an attorney or accountant to determine the best plan forward.
In general, there are four main types of business structures:
- Sole proprietorship – For those just learning how to form a consulting company, this set-up offers the lowest maintenance but with more personal risk. As a single-owner or member, you become responsible for withholding any necessary income taxes, including self-employment taxes, to pay for Social Security and Medicare. The assets and the liabilities of the business are synonymous with your own personal assets and liabilities, so taxes derived from your business pass through your personal tax return when you submit your business income and expenses with your individual Form 1040, Schedule C. An advantage of a sole proprietorship is that it requires very little work to set up as you generally don’t have to register it with the state, but the disadvantage is that your personal assets jeopardized in the event that your work as an independent business owner leads to a lawsuit.
- Limited Liability Companies (LLCs) – Similarly to a sole proprietorship, LLCs are unincorporated business entities with one or more owners. However, an LLC is more costly to establish and offers a more formal business structure, requiring more paperwork and a fee to register formation papers with your state. Profits and losses are managed again here through an owner’s individual tax returns and require withholding self-employment and personal income tax. The main reason someone may elect to set up as an LLC is to avoid personal liability for business debts. However, it’s worth noting that a single-member LLC can be recognized as a disregarded entity which may impact your personal liability and asset protection, so it’s worth taking steps to actualize a separation between the business and the owner(s).
- C Corporation – This type of business structure is typically reserved for big, for-profit business entities with shareholders. In this structure, corporations are treated as separate from the owners of the corporation and must pay corporate taxes on all profits and earned employee income (a practice also known as double taxation). Generally, C Corporation shareholders are exempt from personal liability with this structure as a C Corporation is a completely separate taxpayer from its owners.
- S Corporation – This structure is typically reserved for larger consultancies operating with several employees and shareholders. This setup avoids the double taxation seen with C Corporations, with profits or losses reported on personal tax only once, and shareholders taxed at an individual rate. This requires a separation of stock shares to be distributed among the appointed S Corporation owners who can pay shareholders dividends that aren’t subject to self-employment tax. This can translate to financial savings, but if a shareholder provides a service to the business, the S Corporation is required to pay a reasonable, taxable salary. This structure protects personal assets and avoids personal liability but requires more responsibility from the shareholders. To set up this structure, articles of incorporation forms must be submitted to your Secretary of State along with a fee.
2. Register your business
Now that you’ve committed to your business structure, you’ll need to register your business with your state or local government. This involves filing the necessary paperwork (where applicable), as well as obtaining any required licenses and permits, and paying any associated fees.
3. Set up your business finances
As an independent business owner, you’ll need to keep careful track of your finances, by setting up a separate business bank account, tracking all work-related expenses, and paying taxes in accordance with your business structure. It’s important to create a detailed budget before starting your business, so you can accurately forecast your expenses and determine your pricing strategy.
Determining how much to charge for your services can be challenging, so you’ll want to consider the scope of your expenses, your experience and expertise, and the value you provide to your clients. Researching what other consultants in your field are charging can be helpful in developing a pricing strategy.
There are also consulting business startup costs to consider, whether you’re investing in professional licenses or certifications, subscribing to accounting software or hiring a lawyer, or simply stocking up on office equipment. Making a plan will ensure that you’re staying on top of your financial obligations and avoiding any legal or financial issues down the line. You may also want to earmark funds for required software tools and a small budget for marketing or networking opportunities that could help grow your business. Regardless, it’s important to take steps to avoid confusion and delays come tax time. Here are some potential expenses to consider when setting up your consulting business:
4. Purchase insurance
When working independently there’s no safety net in the form of an employer-provided insurance plan, which means you’ll need to purchase your own insurance to protect yourself and your business. The nature of your work and industry will inform the specific insurance policies you’ll need to get, but some common policies include general liability insurance, professional liability insurance, and property insurance. Take time to research your options and purchase the policies that make the most sense for your business.
5. Make yourself discoverable
Today, having a professional website or social channel is essential for helping your target clients find you. Your website and/or social channels should include information about your services, your background and experience, and most importantly, offer your contact information so you can acquire new prospective clients.
You may also want to consider attending industry events, conferences, and trade shows, as well as joining professional organizations relevant to your field to help identify potential clients and expand your network.
Whether you’re just getting started in setting up your independent consultancy or well-established within your niche, Business Talent Group offers a wide array of resources to help you kickstart your career transition. To learn more, visit the Business Talent Group Business Resource Center here.
About the AuthorMore Content by Candace Corner