Consulting is one of the best ways to generate incremental income. Depending on your expertise, you can charge hundreds or even thousands of dollars per hour.
It’s been a while since I ran my consulting company during business school, so I wanted to survey the current offerings in 2023. There are so many posts about figuring out your consulting niche or finding clients. But I’m more interested in the operational aspects of this task - which company structure to choose? How to get a Tax ID and a bank account? How to Invoice, so that’s what I cover below. Please don’t do any of this stuff unless you have a very strong lead on your first consulting customer. You should have already agreed on your hourly rate or project cost. They should be ready to send you a contract. Otherwise all this business formation work is premature.
I hope this is helpful to you!
Step Zero - Name and Land Your Business
You are going to bring a new entity into the world. The first thing you need to decide is what to call it. Consulting companies are often simply the name of the principal consultant (e.g. ”Choi Consultants”) and there’s power in naming your company after yourself. If you want to scale the company beyond a single person, or see it outlive your participation, you may want to name it something more generalizable (e.g. “Bulldog Consulting”).
After you name it, you should register a domain name and set up your email. I prefer Google Domains since it integrates best with the Google Workspace, which is the best bang-for-buck email/storage/docs provider.
Don’t worry too much about the url. The shorter the better, but you definitely do not need to buy a premium url. Search engines and links will drive all the traffic you need.
Step One - Determine Your Company Structure
Some clients will be fine with you as a “sole proprietor” consultant. But most companies, especially the largest ones, won’t hire you unless you’ve created a business entity that can sign contracts and send invoices.
Of all the various corporate structures available in the US, the best two for solo consultants are:
- LLC - Forming a “Limited Liability Corporation” company for your business shields your personal assets from some liabilities. Profits and losses can be passed through to your personal income without paying corporate taxes. However, members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.
- S Corporations - As with LLCs, an S Corp structure allows the shareholders to pass income, losses and deductions through to their personal accounts for federal tax purposes. This allows S corporations to avoid double taxation on the corporate income.
An LLC is formed by filing articles of organization with the state's secretary of state office. LLCs are not incorporated and do not file articles of incorporation.
LLC regulations vary state by state, and they are generally more complicated for lawyers to deal with, so expect comparatively higher legal and tax bills.
There are requirements to forming an S Corp, but a solo consultant based in the US should have no problem meeting them. As with all this advice, it’s worth double checking and it’s worth what you pay for it.
Other drawbacks to consider with an S Corp: you must name a board of directors (which could just be you), and there are rules about holding board meetings and keeping records
In order to become an S corporation, the corporation must submit Form 2553, Election by a Small Business Corporation signed by all the shareholders. See the Instructions for Form 2553 for all required information and to determine where to file the form. The business setup sites listed below will help with this.
If you are creating a business in Connecticut, the state has a long but thorough guide to doing so here.
Step Two - Bring Your Business into Existence
There are several online services that will file the relevant forms, pay the appropriate state fees, generate business documents and give you a Tax ID. Among the leaders in this segment are:
- Legal Zoom
- Zen Business
- Inc File
- Stripe Atlas - an all-in-one product that’s worth a look if you are creating an LLC. It does not support S Corporations. Atlas costs $500 to set up your company, including all incorporation fees. Then $100 annually for your registered agent.
I haven’t used any of these myself, and there are reasons to not use a service like this and instead hire a lawyer. But for a quick S Corp, I would use Legal Zoom. You can always bring their documents to a lawyer once your consultancy is off the ground and generating revenue. I would certainly consider Stripe Atlas for an LLC.
As part of this process you will:
2.1 Choose a Business Address
It’s easiest to use your residential address as your business address. It’s already paid for and you don’t have to remember to check it. The reason I got a PO Box for my last business is that I got a huge increase in spam mail once I listed my residential address for my previous company. You can’t go too wrong either way.
2.2 Get an EIN
An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number or a Tax ID. It’s used to to identify a business entity both to the government and to your consulting clients.
If the business filing service you chose above didn’t give you a Tax ID, Here’s the online form for getting a Tax ID. It takes about 15 minutes to complete.
At the end of this process, you’ll have what you need to open a bank account.
2.3 Get a General Business License
Most companies with an income stream in the U.S. will need a General Business License to operate in their state. This license is required to register for federal and state identification numbers, which are used for tax purposes.
Any of the business setup sites should provide this as part of the process.
Once this is done, CONGRATULATIONS! You have started a company.
Step Three - Setting up a bank account
Once you have formed your company, have an EIN and an address, you can set up a bank account. If you don’t want to go through the hassle of creating a whole new account, it could work to create a new virtual account at your existing bank.
You must do one of these two things. All your consulting income should flow into one account, and all your consulting expenses should flow out of that account. Segregating personal from business expenses can be a huge pain. Starting with separate accounts and debit/credit cards are the best ways to minimize this.
If you are going to use a new institution for your consultancy, these companies are offering innovative services for small business banking:
- Mercury “100K+ venture-backed and bootstrapped startups build with Mercury.”
- Novo “Free and secure business checking account built for your freelancing or consulting business. Get more time back to focus on your clients.”
- Found “Found handles business banking, taxes, invoicing, and bookkeeping.”
If you just happen to be based in Connecticut, here’s a post about the “Best Small Business Banks” in your state.
Step Four - Setting Up Your Accounting System
This is nowhere near as bad as it sounds. If your bank does not offer accounting software and you aren’t using Stripe’s software, you will have to pick one of these. The good news - there are only a few choices, and they are all much easier to use than they used to be.
The leaders for small business accounting software are:
- Quickbooks Online - The main advantage is that most accountants and tax people use Quickbooks, so if/when you hire someone to help with these processes (and I recommend it for year-end book closing and state/federal taxes), it will be easy to give them the business records.
- Freshbooks
- Xero
- Neat
You do not need to set the whole company up in this software. The goal you have at the start is to be able to send an invoice. Once you’ve gotten that far, take a break and get outside.
Step Five - Fill out and Sign a Consulting Contract
Now that you’ve got all the big chunks of setting up your business done, you need to sign your first consulting customer. Assuming you have a good idea of who this is, work with your client contact to get their standard consulting contract customized to your specifics.
It may take an hour or a week to fill out the contract, largely depending on how much specificity the client needs in describing your engagement. Your client contact will help you as much as possible with this.
5.1 Payment Terms
It’s important that you and your client agree and specify in the contract how and when you will be paid. Ideally, you will be paid X hours at a rate of Y dollars at the start of the engagement. In other words, as soon as the contract is signed, you can send the client an invoice for that amount.
The contract should specify payment terms (Net 30 or Net 60 are reasonable). The contract should also discuss how the client can engage you for additional time or projects “by mutual consent…”
Congrats! You Are In Business!
There are a thousand additional details I’ve left out here. I’m not a lawyer, accountant, tax expert or really anyone with credentials so please exercise your own judgement in all these matters.
That said, hopefully this guide convinces you that it’s not all that hard to start your own business. Personally speaking, creating a business out of thin air has been one of the most gratifying aspects of my professional life. I hope you find the same!