Starting a Consulting Business

Starting a consulting business involves a particular set of legal considerations. These include choosing the proper business entity, obtaining licenses and permits, working with tax issues, preparing policy statements and contracts, getting adequate insurance, and dealing with employees.

Keep in mind that the term "consulting business" can cover a broad range of activities. Some consultants primarily work in their own offices; others work in other people's offices or at indoor or outdoor job sites. Moreover, some consultants are, in one or another legal sense, "professionals;" for example, they may be licensed by the State. In reading through this article, you should make allowances for your particular kind of consulting.

Choosing the Business Entity

Depending on the details of your particular consulting business, you might well be able to operate as a sole proprietorship or partnership. However, you should at least consider using a legal form that protects you from personal liability. In this regard, if you are a member of a recognized profession you not only have more common options, such as a limited liability company or corporation, but also additional options, such as a professional corporation or professional limited liability company.

In many cases, consulting work may not seem particularly dangerous, and situations involving personal liability may seem unlikely. However, if at any point you are responsible for the handling of valuable data, physical property, or perhaps even individual people, you could be at risk of something being damaged or lost, or someone being injured. This might occur at your own business location or it might occur elsewhere—but, in any case, you would want the business, not you personally, to be responsible for any liability.

Learn more about choosing a business structure.

Licenses and Permits

Even if you operate as a sole proprietor, you should consider obtaining a federal tax ID number, known formally as an Employer Identification Number (EIN); for other legal forms of business, an EIN is a requirement. The process is easy and can be completed online at the IRS website. Moreover, even if you operate as a sole proprietor, you may need a general business license from a state or local government office. For example, if your consulting business will operate under a business name different from your own name, you may need to file a "doing-business-as" (DBA) certificate (also known as a fictitious business name certificate).

In addition, in each state there are at least some occupations and professions that require state licenses, ranging from traditional professions such as physicians, lawyers, dentists, and accountants through occupations such as barbers, cosmetologists, real estate agents, and insurance agents. You should make sure you have the proper professional or occupational licensing before putting yourself forward as a consultant.

If you will be selling goods as part of your consulting business, most states require you to obtain a sales tax permit for sale of most products.

Finally, even if your consulting business is "low-key" or office-oriented, there may be local zoning laws that would prohibit your business in certain locations. This generally is more likely to be an issue if you are thinking of operating the business out of your home and you live in a clearly residential, as opposed to commercial, area. Even if the business is permissible under the local zoning ordinance, you may be required to obtain a compliance certificate from the local zoning authority. In short, your best bet is to investigate zoning regulations before you open for business.

Health and Safety

For office-based consultants, health and safety is not likely to be a primary concern. However, if you will be working "in the field" in situations that are potentially dangerous, such as construction sites; or if you are otherwise working with hazardous materials, you should investigate federal Occupational Safety & Health Administration (OSHA) and Environmental Protection Agency (EPA) regulations, as well as your state's occupational health and safety regulations and environmental regulations.

Tax Matters

Your tax situation will vary depending on the legal form of your business (corporation, professional limited liability company, partnership). Even with a sole proprietorship, you need to attach a separate schedule (Schedule C) to your personal income tax return. In more complicated arrangements, such as an S Corporation or a multimember LLC, you will generally have to work with entirely different tax forms. If you previously are used to working as an employee, this added level of complexity can be confusing, at least at first; in which case, the services of a good accountant may be a worthwhile investment.

Consultants are typically self-employed. If you are transitioning from an employed position, you will be working with a new tax form provided by clients paying for your services: IRS Form 1099-MISC. While there can be some exceptions depending on the legal form of your business, you should also be aware that generally, as a self-employed individual, you personally will be subject to the federal self-employment tax. With this additional tax obligation comes the requirement that you make quarterly estimated tax payments; information and instructions regarding these payments is available on IRS Form 1040-ES.

One other matter that is often grouped with tax issues is your status as an independent contractor. The very term "consultant" may seem to imply that you are self-employed rather than an employee. However, it can be useful to review the IRS guidelines regarding independent contractors, such as those contained as part of IRS Form SS-8, as well as parallel state guidelines where available.

Finally, if you run your consulting business out of your home, you may be able to claim a deduction for business use of your home. Details about how to figure the deduction can be found in IRS Publication 587.

Insurance

Appropriate insurance for a consulting business will vary depending on the business's details. Even if you will work mainly out of your own office, you will at least want adequate premises liability insurance, just in case a client or other business-related visitor slips and falls or is otherwise injured at your business location. You will also want adequate property coverage for your physical business equipment; insurance for loss of your own business data is also worth considering. And, depending on your area of expertise, you should also seriously consider – or may even be required to have – professional liability insurance.

If you will work in situations that are more clearly physically dangerous, you should also look more closely at insurance that covers personal injury – both to yourself, and, as necessary, to others. Similarly, if you will be driving between various job sites, you should make sure you have appropriate vehicle insurance.

You may well find that, to get the best information and best coverage, you will need to work with several different insurance agents with different areas of expertise. Try to find agents who have previous experience writing policies in the areas relevant to your business. For example, if you will be consulting on hazardous chemicals, try to find an agent who knows something about coverage for hazardous substances.

For more information, see Nolo's article on Obtaining Business Insurance.

Policy Statements and Contracts

By its very nature, "consulting" is frequently a very flexible business, and different clients may want at least somewhat different services from you; in turn, you may very well be interested in accommodating the varying needs of these different clients. While you do not want to unduly limit what you can offer to potential clients, it still may be in your own interest to formulate and provide in advance—and in writing—at least general policies regarding how you work. If you have a website, you should consider posting your policies there. Regardless of whether you have a website, you may want to create a printed document containing general policy information that you give to each of your clients before you reach any agreements and begin work.

General policy elements could vary widely depending on what kind of consulting you are involved in. They might include billing issues (whether you bill by the job or by the hour; any minimum charges or minimum hourly billing increments; how you charge for travel time; whether you bill bi-weekly, monthly, or only at the end of a project), how you deal with payments (do you take retainers; do you expect monthly or other periodic payments), and who pays for certain expenses (such as special equipment, airfare, or hotels).

At least as important as general policies, however, are the specific agreements you reach with each individual client. Ideally, these will take the form of contracts for service and will spell out in detail a range of matters, including those already mentioned (billing, payments, expenses) as well as the details of the work you are expected to perform.

Keep in mind that, under basic contract law, in order for a contract for services to be legally binding, (a) you and your client must agree on what the contract is for (there must be 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 involved will be completed in less than a year the contract need not be in writing; however, most consultants would not take the risk of providing services without first getting a written, signed agreement. In fact, you should consider drafting—or having a lawyer draft—a standard contract that you can modify for individual clients.

To learn more about policy statements, business contracts, and related matters, see Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo)

Employees

To the extent you will have employees, you should inform yourself about basic employment law issues such as illegal discrimination, workers compensation, and how to handle the hiring process. With regard to hiring in particular, learn how to:

• 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.

A good resource for general employment issues is The Employer's Legal Handbook, by Fred Steingold (Nolo). Also, many key employment laws are administered through the Department of Labor, and there are a variety of informative webpages within the Department of Labor website.