Magazine article Training & Development

How to Start a Consulting Business

Magazine article Training & Development

How to Start a Consulting Business

Article excerpt

How do you go out on your own without going out on a limb? Here are the business basics you'll need for making the break and becoming your own boss.

To mix a metaphor, the budget ax never falls far from the training and development tree; often, it strikes directly. But rather than worry about how easily you could be out on the street, consider yourself just a paycheck away from being successfully self-employed.

Whether you choose self-employment or it is bestowed upon you, your climb up this new career ladder will be easier if you address some critical business issues first. Because no matter how sky-high your eventual consulting income, every practice is built from the ground up on a solid foundation of smart planning.

Choosing a structure

How you structure your business will affect your tax and legal liabilities. In the United States, there are three basic types of business structures: sole proprietorships, partnerships, and corporations.

Sole proprietorships are the simplest business structure. They have no separate legal existence apart from the owner, and they have no additional tax liabilities apart from the owner's liabilities. The owner's Social Security number generally serves as the company's federal taxpayer-identification number, and federal tax reporting of income and loss from a sole proprietorship requires only an additional schedule filed with the Internal Revenue Service 1040 form.

The simplicity of sole proprietorships is also their danger. They have no legal existence separate from you, the owner. So any liabilities - tax, legal, and otherwise - that befall the business become your personal liabilities. In other words, if a client sues you for not living up to your contract, all your personal assets are on the line.

Partnerships generally permit those participating to share expenses and profits, either equally or on a predetermined percentage basis. How partners will share the gains and losses of the business should be established in the partnership agreement. That decision is generally related to the amount that the different partners contribute in money, property, labor, and skill.

Like sole proprietorships, partnerships are not separate entities for federal tax obligations. But they must have their own IRS employer-identification numbers, obtained with IRS Form SS-4, and they must file a partnership return, even though they pay no federal tax. (Partnerships may be required to file state and local taxes.) Partners report the income and losses from the partnership on their personal returns.

Legally, partnerships can be nightmares. As a general partner, you are fully responsible for the liabilities incurred by the other partners, regardless of whether you had a hand in the activity or negligence that put you at risk.

Unlike the first two structures, corporations are legal and taxable entities that exist separately from the individuals who invest in them. That separation provides a fire wall of protection for investors when the corporation is sued or when the government believes it has not received its fair share of the profits.

Corporations, formed when investors transfer money or other assets for stock, are required to pay income taxes separate from those paid by the investors. The income and deduction rules that apply to individuals generally apply to corporations, but corporations are entitled to additional deductions.

In the United States, a special kind of corporation, known as an S corporation, is available to organizations that have fewer than 35 investors. All the shareholders must be U.S. citizens or residents, and the corporation must be organized in the United States or under federal or state law. As in partnerships, S corporations avoid double taxation on income to the corporation and dividends to shareholders. Instead, corporate income is passed on to the shareholders and reported on their personal returns. …

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