Sole Proprietorship Consulting Business
A sole proprietorship consulting business is for individual entrepreneurs who want to start their own venture and have specific expertise in a valuable area.3 min read
A sole proprietorship consulting business is a popular choice for individual entrepreneurs who want to start their own venture and have specific expertise in a valuable area, such as technology or design. This is a flexible business that allows you to work from home or in an office setting as you help clients bolster their own companies. When starting a consulting business, you need to determine the best entity for your business, obtain the required permits and licenses, consider tax issues, prepare contracts, and purchase insurance.
Selecting a Business Entity
Although many consultants operate a sole proprietorship, you may also want to establish an independent business entity that provides personal liability protection, such as a corporation or limited liability company (LLC). This protects your personal assets in the event that your business is sued.
Obtaining Licenses and Permits
Even sole proprietors must obtain a federal tax ID number, known as an employer identification number (EIN). This can be requested for free at the IRS website. In some states and municipalities, you may also need a business license. If you are operating the consulting business under a different name than your legal name, you will need to register a fictitious or DBA (doing business as) name. Some states require consultants to obtain a professional license. If you will be selling products, you need to file for a sales tax permit. If you are operating the business out of your home, be sure to check local zoning regulations before you begin.
Understanding Business Taxation
Your business will be subject to different tax laws depending on whether you choose to operate a sole proprietorship, LLC, partnership, or corporation. Sole proprietorship income and losses are reported on the owner's individual tax return using Schedule C. Your clients will provide a 1099-MISC form that details the amount they have paid you for your services. As an independent contractor, you will be responsible for paying federal self-employment tax and making quarterly estimated tax payments. If you run a home-based business, you may be eligible for a deduction.
Purchasing Business Insurance
The appropriate insurance will vary depending on the purpose of your consulting business.
- Premises liability insurance covers accidental injuries that occur at your workplace.
- Property insurance will cover the loss of your physical business equipment, such as your computer and other technology.
- Professional liability insurance may be required depending on your area of consulting.
Because the services you offer vary depending on client needs, it's important to make sure each project is clearly commemorated with a formal contract. You may also want to develop general policies that can be posted on your website or given to clients before work begins. These policies could include billing requirements, how travel time is charged, how payment is given, and who pays for expenses.
Specific client agreements should cover the details of payment, billing, and expenses and delineate the scope of work, terms, and conditions of the project. For an agreement to be legally enforceable, it must contain written agreement from both parties as well as an exchange of consideration, or item of value.
Advantages of Incorporating
Many consultants struggle with the question of whether to continue as a sole proprietor or incorporate their business into a separate entity. Some of the advantages of incorporating include:
- Limited personal liability for business obligations, debts, and legal judgments
- Potential tax savings depending on the specifics of your business finances
- The ability to maximize retirement fund contributions to reduce taxable income
- Reduced chance of tax audit compared to a sole proprietorship; self-employed individuals are audited by the IRS more commonly than established businesses are
- The ability to purchase an affordable healthcare plan at a corporate rate
- Increased credibility with current and potential clients, investors, and stakeholders
Disadvantages of Incorporating
Incorporating is not the right choice for every sole proprietor. Sometimes, doing so can be cost-prohibitive or subject your business to arduous regulations. Talk with an attorney and tax professional before taking this step.
If you need help with establishing a sole proprietorship for your consulting business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.