Expenses Consideration for your Consulting Practice

A sole proprietorship is any business operated by one single individual without any formal structure or registration requirements. A sole proprietorship is the simplest and least expensive business legal structure when you are starting out. It is also the easiest because it requires less paperwork and you can report your business income on your personal tax return. One drawback to this type of business is that you are personally liable for any debts of the business.

Without going through any formal processes, you can begin your consulting business simply by getting the word out that you’re in business. But you’ll still need a business license to conduct business.

Pros

• Easy to start
• Low start-up costs
• Flexible and informal
• Business losses can often be deducted from personal income for tax purposes

Cons

• Unlimited personal liability: the sole proprietor can be held personally responsible for debts and judgments placed against the business. This means that all personal income and assets, not just those of the business, can be seized to recoup losses or pay damages.
• All business income earned must be reported and is taxed as personal income.
• More difficult to raise capital for the business

A partnership is precisely as its name implies, a business venture entered into by two or more people with the intent to carry on business and earn profits. Partnerships can be beneficial for consultants as the workload and finances can be shared, and partners with differing areas of expertise can increase business opportunities.

You must register your partnership with a corporate registry. This does not mean that you must incorporate, only that you are making a formal declaration of entering into business with another person or persons. Be sure to consult your local business registry and a lawyer specializing in business registry. The primary purpose for doing this is for each partner to protect himself or herself concerning issues such as sharing profits, liability and dissolving the partnership equitably.

Pros

• More initial equity for start-up costs
• Broader areas of expertise can lead to increased opportunities
• Lower start-up costs than incorporation
• Some tax advantages

Cons

• All partners are equally liable for the other’s mistakes with the same liability as a sole proprietorship
• Profits and losses must be shared
• The business must be dissolved and reorganized when a partner leaves

Beyond any legal issues, before going into business with a partner you should spend many hours talking about how you will work together, including:

• What each of you will be responsible for
• How you will make decisions on a day-to-day basis
• What percentage of the business each of you will own
• How you see the business developing in the future
• What you expect from each other

During your discussions you can learn if there are any areas where you need to compromise. For example, one of you may want to start your business as a part-time job, while the other wants to work full-time and eventually build a business that will employ a dozen or more people. You can avoid future misunderstandings by putting the points you have agreed on into a written “partnership agreement” that covers any possibility you can think of (including one of you leaving the business at some point in the future).

Incorporation of a business means that a separate, legal corporate entity has been created for the purpose of conducting business. Like an individual, corporations can be taxed, sued, can enter contractual agreements and are liable for their debts. Corporations are characterized by shareholders, a board of directors and various company officers.

 As such, ownership interests can be freely transferred.

Creating a corporation requires filing of numerous documents to legalize your consulting business, as well as formally naming a president, shareholders, and director(s), all of whom can be a single person as set out in the company charter. As the rules and forms required for incorporation vary from state to state and province to province, it’s best to consult your local business licensing office or a local lawyer specializing in incorporation.

While it is probably best to seek legal expertise when incorporating, if you have the expertise and knowledge, you can incorporate your own business or use one of the many online resources that specialize in these matters. There are a few websites offering such services, often for only a couple of hundred dollars:

Although some business consultants do not see the necessity for incorporation, others like Pat Curley of St. Lawrence Business Consultants Ltd. see it as a must for anyone entering independent consulting:

 “I incorporated my consulting business right away. I wanted to protect myself and my personal assets from liability. I strongly recommend incorporating.” — Pat Curley St. Lawrence Business Consultants Ltd.

Pros

• Protect personal assets and income from liability by separating your business income and assets from your personal
• Corporations get greater tax breaks and incentives
• Ownership can be sold or transferred if the owner wishes to retire or leave the business
• Banks and other lending institutions tend to have more faith in incorporated businesses so raising capital is easier

Cons

• Increased start-up costs
• Substantial increase in paperwork
• Your business losses cannot be offset against your personal income
• Corporations are more closely regulated

An S Corporation is similar to the corporation in most ways, but with some tax advantages. The corporation can pass its earnings and profits on as dividends to the shareholder(s). However, as an employee of the corporation you do have to pay yourself a wage that meets the government’s reasonable standards of compensation just as if you were paying someone else to do your job.

A Limited Liability Company is a newer type of business legal structure in the U.S. It is a combination of a sole proprietorship (where there is only one member of the LLC) or partnership and a corporation, and is considered to have some of the best attributes of each, including lim ited personal liability.

An LLC business structure gives you the benefits of a partnership or S corporation while providing personal asset protection like a corporation. Similar to incorporating, there will be substantial paperwork involved in establishing this business structure. LLCs have flexible tax options, but are usually taxed like a partnership.

Pros

• Limited liability similar to a corporation
• Tax advantages similar to a corporation
• Can be started with one (except in Massachusetts) or more members like a sole proprietorship or partnership

Cons

• More costly to start than a sole proprietorship or partnership
• Consensus among members may become an issue
• LLC dissolves if any member leaves

As an HR Consultant, you’ll be working in one of 2 ways:

• At your client’s location
• In your own space when executing on client work or administration tasks

When working away from a client’s office, you’ll likely be working from a home office.  However, some people simply can’t work from home because they’re unable to focus or they need the buzz and structure of working with other people.  If you fall into that category, you may want to consider getting an industrial office space or shared collaborative space where meeting rooms and reception services are shared.

Your other option is to find someone or a business that has extra office space that they would consider renting out.

If you need the buzz of people around you, you can also work from a coffee shop or library.

You’ll likely need the following equipment and tools:

Printer.  Get a printer that has scanner and photocopy functions as well. Although it’s desirable to go paperless, there’ll be times when you’ll need to print documents to be handed out during presentations or scan documents to be sent to clients.

Paper shredder.  As you will have access to proprietary/sensitive documents that need to be junked, be sure to get a good quality shredder that can do a good job chopping up papers so that they cannot be pieced up again.  Considerations when choosing a shredder includes speed, capacity (number of sheets that can be shredded at one time) and security (size of the shreds)

Landline phone.  Best to get a landline with answering machine for the office and a mobile phone with data plan and voice mail so that you can stay connected with your clients when you’re on the road.

Laptop.  Besides pricing, other important considerations when purchasing a laptop include size, weight and speed. As you will be lugging your laptop to meetings and client’s office, choose a laptop that’s not too big or heavy. Your shoulders will thank you for that.

Business cards.  A business card gives a professional impression. The card also contains your contact details and so, it’ll make it easy for the person you’re meeting to reach out to you again.

You’ll likely incur the following annual expenses that you should budget for:

• VAT taxes you collect from your clients (such as GST or HST) minus the same taxes you pay out when paying for expenses
• Income taxes
• WCB premiums
• Legal incorporation filing fees (if incorporated and using a lawyer)
• Annual insurance premiums if not paying monthly
• Business License fee
• Business PO mailbox