Setting up a consulting business can feel daunting — and that’s before you tackle all the legal questions surrounding it. But attorneys Michele Leonelli and Mick McGirr from Phocus Law say it doesn’t have to be. If you ask yourself a few crucial questions before putting your plans in motion, you can create a consulting business that’s legally protected and well-staffed — with efficient agreements that ensure that both you and your clients get what you want out of a deal. Here are three tips to get you started.
“Picking the right legal entity for your consulting business is critical, but it doesn’t need to be a nightmare,” says Leonelli.
When creating your consulting business, the most important decision is the first: which legal entity will you choose for your business? The most common 3 structures are a corporation, a partnership, or an LLC, and there are pros and cons to selecting each.
All new business owners should look for a structure that balances legal protection with ease of: setup, sale, and fundraising. Of the three most common legal entities — a corporation, partnership, or LLC — Leonelli and McGirr recommend an LLC. Like a corporation, the LLC offers liability protection for its owners. While the tax benefits of an LLC don’t always compare favorably to those of a corporation, an LLC offers a more flexible structure that is cheaper to launch and easier to govern than the corporation. This allows new business owners to get started with their dream business with a high degree of protection, and a minimal amount of hassle.
Once you’ve determined the legal entity for your consulting business, you still need to ask yourself a few key questions, like: (i) how to operate your business in order to maximize your liability protection; (ii) how to ensure statutory compliance; and (iii)how you’ll create your LLC’s Operating Agreement. “Hands-down the most important governing document for your LLC is the Operating Agreement – this should be drafted by a lawyer, shortcuts will only cause pain down the road.”
Now it’s time to hire your team, which means deciding between employees, fractional roles, and independent contractors. Each consulting business is different, so there’s no clear-cut right answer here for how best to classify your staff.
But Leonelli and McGirr recommend asking a few salient questions to determine which route is best for your business. Deciding between employees and independent contractors comes down to the nature of your relationship, the degree of control you want to maintain in that relationship, and the financial incentive structure that works best for your budget and your billing needs.
To home in on the right answer for your business, Leonelli and McGirr recommend considering each of these questions in light of a bigger question, namely, what’s the cost to your company of misclassifying your employees? A complete picture of benefits and risks will equip you to pick the best structure for the current realities and functions of your business.
Once you’ve the legal entity for your business, you’re ready to bring in clients. Introducing a new party into the picture brings inherent risks and complications — and more possibility for things to go wrong. Start smart by creating a thorough services agreement that ensures a clear, well-defined working relationship for all parties. A services agreement is the key agreement between you and your clients, explicitly spelling out what you’re offering, for how long, for how much, and on what terms.
There are two main options for service agreements: a Master Service Agreement (or “MSA”), or a Sale of Services Agreement, or SSA. The MSA is more thorough and detailed than the SSA, and it is usually used in situations where multiple engagements are anticipated between the company and the client. While the body of the MSA will contain the bedrock legal terms for all projects, the company can attach a standalone statement of work (“SOW”) detailing the specifics of each individual project. Leonelli and McGirr recommend drafting one MSA that you use throughout a client relationship, supplementing with SOWs when necessary.
A good MSA should specify, among other things, the scope of a project, how much and how you will be paid, how intellectual property will be protected, whether the deal is exclusive, and whether the agreement is project- or time-based. These stipulations form the core of an MSA and should be supplemented with details particular to the project.
“The MSA will be your consulting business’ most important client-facing document; it’s essential to draft it properly at the outset to ensure you protect your business and maximize your business opportunities. An ounce of prevention equals a pound of cure,” says Leonelli.
Congratulations — in just a few easy steps, you’ve launched a successful, well-staffed, legally-protected consulting business that will meet your needs as well as your clients’. Now it’s time to get to work on what inspired you to start your business in the first place.
Looking for more info on how to get your consulting business started? Check out our consulting checklist.