I recently had someone ask me about how to start their own consulting business. Since I get this question often, I thought I’d put the basics here, for all those who are thinking about this option. The three biggest issues have to do with business format, pricing, and scope of services.
There are 3 main options. The choice of which is right for you depends on how much risk you can tolerate, if you plan to have employees or manufacture a product, and so on.
1. The easiest way to start out is as a sole proprietor – basically, you are the business. You report the income with your personal income taxes, and do not have to fill out any paperwork to start or stop the business. However, since you are the business, if someone sues you for a business practice, they can go after your personal assets.
2. At the other end of the spectrum is incorporation – you create a new legal entity (the corporation), that is completely separate from you personally. The corporation pays its own taxes and has regulatory and reporting requirements. However, this separates personal and corporate assets, and makes it clear that you are a professional and in business.
3. In between, and probably the most commonly used method today, is to form an LLC – a limited liability corporation, which has some of the protection of a corporation without all of the expenses and legal paperwork of a full corporation.
There are some great books by Nolo Press that explain the details of each (but make sure to check what applies in your state).
Again, there are a number of different ways to set prices. The easiest is that if the job would pay a salary of $X,000 per year, a consultant should charge $X/hour to do the same thing. This has to be tempered by what the market will bear, what your competitors (if any) are charging, what other resources they have to get the work done, urgency, and so on.
Scope of Services:
This is highly personal, and depends on what expertise you have developed, what needs there are in the market, what you are legally allowed to disclose (for example, in light of non-compete agreements with former employers).
Consulting can be highly rewarding, both intellectually and financially. However, you can’t just hang out a shingle and have people throw money at you. It takes work – not only the consulting work, but marketing, networking, accounting, and much more. Just like a real business!