This one step ^ choosing a goal and sticking to it ^ changes everything. Scott Reed
The most common legal structures for a consulting business are the sole proprietorship/ trader, the partnership and the limited company. The structure you choose will be related to your overall business objectives.
Sole proprietorships/traders
Most consulting businesses are sole traders. Under this arrangement you and your business are one and the same. Mostly, if you use your name as the business name, you do not have to file under the assumed business name status. Your firm’s net income is taxable as your personal income. You have an unlimited liability for the debts of your firm. This type of business organization is simple yet effective as you are starting your consulting business. Even if you want to work with another person, it is often better to begin the cooperation as two sole traders. This gives you an opportunity to try out the working relationship, before formalizing a partnership. Unfortunately, there are a lot more broken partnerships than successful ones!
Partnerships
There are two types of partners, general and limited. General partners control the day-to- day operations of the firm and usually have unlimited liability for the firm’s debts. Limited partners, also known as silent partners, exercise no control over daily operations. They typically invest money in return for a share of the firm’s profits.
Establishing Your Business Direction / 67
Foul!
Many individuals, who have worked together very successfully in a corporation, fail when they try to work together as partners. There are a variety of reasons for this
1. When working in an organization, the payment is not dependent on the working relationship. Often partners divide because there is not enough business for both partners: one can generate business, but can’t do the work. The other can do the work, but cannot generate business. This creates ill-feeling between them.
2. Working in a formal organization structure, there are de¢ned standards and procedures. Working in a partnership, individuals have to de¢ne their own structure and they may approach this process di¡erently.
3. If the partners are not clear when de¢ning roles and responsibilities, it can result in frustration and disappointment between partners because others are not ‘doing their job’.
4. Working together,‘on top of each other’, is di¡erent from working in an organization where there are other individuals present.
So think carefully before you make this large commitment. Lawyers may tend to make more money from partnerships than individuals do!
Limited companies
These are generally legal entities separate and distinct from you as an individual. Most larger businesses are limited companies. This brings several advantages including permanence, continuing despite the death of individual shareholders, and your personal liability is limited to the amount invested in stock. However, limited companies have several disadvantages in that they are typically subject to higher taxes and fees, and the procedures, reports and statements required by the government may become cumbersome. See the later section for more information on the tax advantages and disadvantages of a limited company.
Sole trader
Advantages Disadvantages
X You can claim direct expenses related to the business such as telephone, heat, light, car, meals, etc. Check with your financial adviser for specific deductions allowed currently.
X You can use personal pension schemes to reduce tax liability.
X Often, if you work from home, you reduce travel time and expenses. When you do travel for the client you get these costs reimbursed.
X This is the simplest structure when working independently.
X Lower administrative overheads.
X Taxes can be self-assessed.
X Less taxes.
X If you are making losses initially you can deduct these against any taxes you are paying on full-time employment.
X You are responsible for tracking costs and revenue and filing tax returns bi- annually.
X You pay National Insurance
Contribution but you are not eligible to claim unemployment benefits.
X If you are sick, or have illness in the family, your business may be exposed and you may have inadequate financial resources.
X Less credibility as a sole trader (may be perceived that way).
X May have to guarantee personal loans because of less ‘business presence’.
X As a business owner you may be liable for losses and debts.
Partnership
Advantages Disadvantages
X You have someone else to ask difficult questions.
X You have someone else who shares tax liability.
X Apart from the complexity of deciding separate tax bills there are no disadvantages.
Limited company
Advantages Disadvantages
X There is a limit to corporation tax on profits up to £200,000.
X Company pension schemes for ‘owner directors’ are more generous in terms of tax relief than for an individual.
X Advantage can be made of additional business deductions such as company cars, although these are less present now than previously.
X Greater credibility associated with being a limited company (possibly).
X Banks may be willing to provide a loan without a personal guarantee.
X Directors are not personally liable for company losses.
X There are more stringent reporting requirements than a sole trader.
X Higher taxes.
X Taxes cannot be self-assessed – need accounting support.
Financial and tax implications for different structures 68/ Be a Successful Consultant
Establishing Your Business Direction / 69
Case study: Marie
Marie has decided to get started as quickly as possible. She has decided that she is going to stay as a sole trader, in the same way as she did last time that she was independent. She believes this will give her the flexibility in the short term, and then she can decide at a later date if she wishes to become a limited company. She has written a simple business plan following the outline in the materials for her own use only, as she does not want to use external funding to start the business.
Exercise 4.2 Choosing your consulting business structure
X Take a moment and think about the different ways of structuring your business: sole trader
partnership limited company.
X Review the advantages and possible disadvantages of each structure. X Think about your business, which structure will you select?
X What are the advantages of this structure and how will you make sure you benefit from them?
X What could be the possible risks associated with that structure and how could you overcome these?
Coaching point
If you are just getting started and are not sure which structure you want to use, begin with sole trader. It requires very little set-up time or administrative overhead, it is legal and you can evaluate this decision later.
Case study: Julia
Even though Julia is just starting up, she has decided to set her business up as a limited liability company because of the area she focuses on: human resources. She wants more legal protection in case she provides advice which then results in a client suing her. Particularly with the sensitivity and possible liability associated with sexual harassment, she feels the increased costs involved will pay for themselves with the additional protection she will possess as a limited liability company.