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Out on Your Own? Five Basics to Getting Started

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Congratulations! You've made the commitment to leave the safe harbor of corporate life and chart your own exciting course as a self-employed consultant. But now what? Without the familiar support system and structure of the corporate world, it's all too easy to be overwhelmed by a growing list of questions and concerns: Do I need a business license? Should I incorporate my business? What do you mean I can't just use my old business cards?

Don't despair! Even the most seasoned consultant had to start somewhere, and most will tell you that as they embarked on their new adventure, they quickly learned the importance of getting their proverbial ducks in a row. After all, the devil is in the details!

1. Getting Licensed



When starting your business, don't forget the legal aspect of things. Most cities/municipalities in which you conduct business require that you register your business and pay an annual business tax. Part of this process includes registering your company's name with the city clerk. The best way to learn about your city's regulations is to do a web search on ''(Your City) Business License.''

You may decide to create an identity for your business, including a company name. When conducting business under any name besides your own, you must register it with your local authority, typically the city in which your business is located. This is generally referred to as DBA (''doing business as'') or fictitious name registration. Usually, your city's business department or its website are easily accessible sources to learn specific registration requirements and processes. Your local Chamber of Commerce or the Small Business Administration office near you will also be of assistance.

Once you've registered, the agency will typically give you information regarding additional requirements. These might include announcing your newly established fictitious business name for a specific period in local publications. Many city registration groups assist you by providing lists of announcement alternatives. You may also be required to obtain zoning permits, a business license, and/or pay applicable city taxes.

You'll need to determine the specifics for your area. It's your responsibility to investigate and follow the required guidelines for your city. If you're uncertain about the process, you might consider consulting a small business attorney in your town.

2. Got Insurance?

Often, larger companies require consultants to have general or business liability insurance. This insurance provides you protection against claims of bodily injury or property damage for which your business may be legally responsible. More often than not, you'll need to supply proof that you carry this coverage whenever consulting or contracting with larger companies, because they want to make sure they won't be held liable should something happen.

You can find insurance through many insurance companies. Your personal insurance agent may offer a small business liability policy that will cover you in your official capacity, as well as liability claims for bodily injury or property damage resulting from the distribution or sale of your products and services. Professional liability insurance, also knows as errors and omissions insurance, provides protection against claims as a result of an error or omission in your professional work. This type of insurance may be critical, depending on the type of consulting that you offer — especially if your services can directly impact your clients in a financial or legal way. For example, it's a good idea to look at professional liability insurance if you do programming, technical, financial, or engineering work.

3. Consultant, Prove Thyself

As a consultant, companies will pay you without deducting any taxes and report what they paid you on a 1099 form at the end of the year, making you responsible for submitting your taxes directly to the IRS. Since the IRS wants to make sure it gets the money, they've implemented strict requirements for who can and can't be classified as a consultant.

Creating a corporation for your business automatically exempts you from proving that you're an independent consultant. However, if you choose not to incorporate, you can still prove you're an independent consultant. Most of the IRS's criteria center on showing that you're a business providing services to the general public, which means having business cards, a website, or other collateral that advertises your services. Being listed in a member directory of a professional organization also demonstrates that your services are available to the general public.

The IRS focuses very closely on consultants working from client sites. Make sure that you have a dedicated office (even if it's in your home) where you've invested in your own equipment and from which you do most of your work. This doesn't prohibit you from working at a client site, but don't let the client's place of business be your primary workplace. Stipulate in your contracts that you work from your office and will be on-site as needed.

One of the best ways to differentiate yourself as an independent consultant is to charge project fees or make payments contingent on deliverables. You need to demonstrate that you're providing specific expertise and that the company isn't giving you day-to-day direction or paying you like an employee (hourly or a salary). Finally, having more than one client at a time and not letting any one client be more than 50% of your annual revenue further proves that you're a consulting business and not an employee disguised as a contractor.

Most large companies require consultants to be evaluated by their purchasing or HR departments before they will sign a contract or purchase order. This evaluation, commonly known as ''the 20 questions,'' involves completing a questionnaire and providing copies of your business license, business card, letterhead, and collateral, and a printout of your website to prove that you're an independent business. You may also have to provide proof of liability insurance and list your client on the policy.

Whether a company requires this proof or not before signing a contract, have this information available and ready as needed. It's the best way to establish yourself as a legitimate business.

4. To Incorporate or Not, That Is the Question…

Once you've decided to start a business, one of the next decisions that must be made is choosing a form of ownership. The choice depends on your short- and long-term goals and the eventual exit strategy of the founders. To make that choice, a lawyer should be consulted.

There are liability and tax advantages to some forms of business ownership. Incorporating will mean extra paperwork, as well as legal and tax costs, but an attorney can evaluate your particular situation. The following brief overview of the forms of ownership can help you understand the choice you need to make.

''C'' and ''S'' Corporations
The question of whether to incorporate or not is usually focused on liability. For professionals, such as accountants, the corporate form of ownership might protect them from liability, but it doesn't shield them from personal liability or from their own or subordinates errors and omissions. There are two forms of corporations, "C" and "S" corporations, which differ in how federal and state income tax laws are applied. "C" corporations are taxed once at the entity level and again at the individual ownership level when earnings are distributed. "S" corporations are taxed at only the individual levels, although there are some exceptions, including nominal tax rates in some states. Both allow the corporation to pay all expenses, including healthcare and payroll. It's best to work with an attorney to understand the differences and which is right for you.

Limited Liability Corporations
Limited liability corporations (LLCs) are available in every state. They offer the liability protection of the corporate form, while giving the owner the option to pass income through and be taxed at the individual level versus completing both a corporate and individual return. Again, they don't shield from personal liability or from errors and omissions. LLCs are a relatively new form of ownership, and the effectiveness of the liability protection of an LLC has yet to be extensively tested in the court system. In addition, some states impose a gross receipt tax on the LLC. In California, LLCs are taxed a minimum tax of $800, as well as a gross receipt tax that goes up to $11,790, starting at $900 for $259,000 in revenue — this is in addition to the added income taxes owed at the personal level.

Sole Proprietors
Sole proprietors are the least complex and most common form of business ownership — and usually the easiest choice. The sole proprietor has unlimited liability for the debts of the enterprise. Many sole proprietors purchase general business liability insurance for this reason. The profit and loss of the business is reported directly on the individual tax return of the owner, and there are no other required tax returns. Healthcare premiums are completely deductible, as are business expenses and half of all self-employment (Social Security and Medicare) taxes.

The easiest way to think about the form of ownership that you'll choose is to determine how much protection your personal assets need. Do you have potential liability in your line of work? Is it insurable through business liability insurance? If not, would a corporate entity give any added protection?

5. Outsourcing Support Functions

Unless your area of expertise is one of the areas below, you may want to build a solid support team that enables you to focus on what you do best.

Tax Accountant
Of all the professional services to consider when you first begin your consultancy, a tax accountant can be most beneficial when it comes to preparing a solid financial plan for your business. A tax accountant can help you understand things like a home-office deduction, clarify business office expenses, and, most importantly, explain what strategies to employ if you don't have enough money to pay your taxes. In addition, a tax accountant can keep you current on how new tax laws will affect you as you set up your business, and explain the various tax forms that will be required of you during filings.

For those consultants who are being asked to fill out a 1099, a tax accountant can also help to provide the most efficient way to file estimated quarterly taxes. When you receive a 1099, you need to make sure that you're saving approximately half of that income for the IRS. Being on top of IRS-related matters is critical when you're an independent consultant. It's important to know when you need to file, and to understand the implications if you don't file on time. Keeping a steady cash flow in a bank account will also make you feel much more comfortable as you continue projects, and a tax accountant can help you to get organized on a quarterly or bi-annual basis.

Attorney
An attorney is useful for contracts and negotiations, although many companies today use an in-house attorney to provide standard template contracts when using an independent consultant or contractor. If you do have the budget to hire an attorney, find someone who is local and who is familiar with contract work, as you may want someone to review these standard contracts to ensure that your payment schedule, terms, and services are protected. You may also choose a legal service. For a monthly fee, these services provide you access to legal help for items such as contract review, letter writing, or general questions.

Web Host and Maintenance
Selecting a reliable and cost-effective web hosting service is important to your overall online strategy. If you want a website that's up 24 hours a day, 7 days a week, and is uploaded quickly, you'll want to select a web hosting service that's reliable and reputable. When starting out your consulting business, you may also want to set up email aliases and a website domain along with web backups. Many hosting services offer packages that include the hosting, email aliases, and domain in one package along with support service. Make sure you select a hosting service that meets the primary needs of your business, and remember that your website will be a reflection of your service to potential customers. Additionally, or further down the line, if you have the budget and need, you may want to look into dedicated servers — they may be more costly, but allow for more flexibility.

Virtual Assistant
Although once considered a luxury, many consultants are finding that virtual assistants (either part- or full-time) are helping their businesses grow by allowing them to focus on getting new clients. Virtual assistants today can do everything from administrative tasks to bookkeeping and can essentially help to take the maintenance and paperwork off of your plate. Important tasks, such as billing a client, setting up a key meeting, or finishing up that proposal, can seem daunting when you're juggling two to four clients at once. A virtual assistant can provide immediate support and give you the peace of mind that the tactical work is getting done for your business, even if you don't have the time to do it!

About WIC

Women in Consulting is a dynamic organization of over 500 members and affiliates who are seasoned professional consultants in more than 30 specialties, ranging from engineering to financial advising and marketing. The WIC mission is to create a community of consultants who work together to build strong businesses through networking and skills development. Celebrating the organization's 10th anniversary in 2008, WIC was established as a nonprofit, collaborative community to foster successful consulting practices for its members. For more information, visit www.womeninconsulting.org.
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