When you are starting your consultancy business you will need to register a type of business. It is important that you choose the right structure for your consulting business as this has an impact on your level of risk and other things such as tax breaks.
What Consultant Business Model have you chosen?
There are four consultant business models that you can choose from, which are:
- 1. The solo consultant model
- 2. The consulting firm model
- 3. The productized model
- 4. The hybrid model
A lot of people choose the solo consultant model when they are just starting. This is OK, and it would seem like a good idea to register as a sole proprietor if you only want to use this model. The problem with this is that you will not have the flexibility to easily change to another consultancy business model if you want to do this down the line.
When you go for the solo consulting model it will be almost impossible for you to sell your consulting business. The reason is that the whole business revolves around you and nobody is going to want to purchase this if you are not part of it.
When you start a consulting business, you should always have an exit strategy. One of the most common exit strategies is to build up a business and then sell it. The only possible exit strategy for a solo consultant is to make a specified amount of money and then retire from the business, living on the proceeds and a pension, etc.
The Sole Proprietorship
We have already touched on this but you need to know the advantages and disadvantages of creating a sole proprietorship for your consulting business. A major advantage of this type of business is that it is pretty easy to setup and you can usually do this quickly and without too much paperwork.
The major disadvantage of a sole proprietorship is that you have total responsibility for the business. All profits and debts are your responsibility, and if there are any legal issues, then you will be liable. You are also unlikely to get any tax breaks when you have this kind of business entity.
A Partnership
With a partnership you will be going into business with one or more other people. Here the responsibility for the business is shared between the partners. To form a partnership, you can create a partnership agreement or have a lawyer draw one up for you.
In some cases there can be some tax advantages to forming a partnership with other people for your consultancy business.
Limited Liability Company (LLC)
An LLC is the most difficult of the business structures to set up, but it has the advantage of limiting the liability of the business owners and shareholders. Having an LLC for your consulting business will provide you with a lot of flexibility, which you will not have with a sole proprietorship or a partnership.
There need to be at least 2 people involved in the formation of an LLC. You need to think long-term when you are setting up your business structure. You can do a lot more with an LLC and it will be easy for you to transition from one consulting business model to another.
