Sole proprietorships are the easiest business structures, but they expose business owners to liability. LLCs are a popular choice among consultants because they don't require as much paperwork as S and C corporations, but they provide more legal protection than sole proprietorships. In the eyes of the law, sole proprietorships are considered “transfer entities”. This means that your business and personal assets and liabilities are considered just one thing.
As a result, you don't have to file a separate tax return for your company; that company's profits and losses are simply transferred directly to your tax return. When it's time to file your taxes, simply report the company's income and expenses on Schedule C of your individual Form 1040. However, keep in mind that you will be responsible for withholding necessary income taxes, such as self-employment taxes, which pay for Medicare and Social Security expenses. The biggest drawback of operating as a sole proprietorship is that it exposes your personal assets to risks.
For example, if a client blames his consultant for financial losses and sues him for negligence, his personal assets, including his bank account and home, could be at stake if he wins. It's a risk you need to make sure you're prepared to take. Like a sole proprietorship, all profits and losses from the LLC are transferred to the owners' individual tax returns. Every landlord must also withhold personal income and labor tax for own account.
There's also more paperwork involved. The Secretary of State requires you to submit the statutes (a fee must be paid). In addition, it's considered a good way to draft an operating agreement for your LLC. This agreement sets out what is expected of each owner of an LLC. So why form an LLC? Unlike sole proprietorships, LLCs offer better asset protection, including protecting homeowners from personal liability.
This can happen if your company is sued for negligence, if it is involved in illegal activity, or if one of your co-owners is found responsible for a personal crime. The only way your personal assets are at risk is if the LLC's operation “crosses the corporate veil” and it is determined that there is little difference between the owner's assets and those of the company. In that case, personal property can be seized. To avoid this, it's important to distinguish yourself from your business, starting with keeping separate bank accounts.
To create an S corporation, the Secretary of State requires that new companies submit articles of incorporation and pay the registration fee. A board of directors must also be appointed. As with a sole proprietorship, the gains and losses of the S corporation are transferred to shareholders' personal tax returns, where they will be taxed at the individual rate instead of at the rate corporate. S corporations can also pay dividends to shareholders.
The advantage here is that those dividends are not subject to self-employment tax, resulting in substantial savings for the corporation. However, if a shareholder provides a service to the S Corporation, the corporation must pay the shareholder a salary, which is taxable. Another benefit of S corporations is that they avoid double taxation of C corporations. As with an S corporation, the Secretary of State requires that you submit the articles of incorporation and, at the same time, elects a board of directors that will assign business activities to the officers. Your C corporation will have to pay appropriate taxes on all profits.
In addition to that, all employees of Corporation C will also be required to pay taxes on their earned income. Because taxes are imposed at two levels, what is known as double taxation is created. However, your C corporation won't have to pay corporate taxes if it ends up showing losses during the year. This can happen for unlimited years due to the fact that C corporations are generally presumed to be for-profit companies. Showing a loss can result in savings benefits when it comes to paying taxes.
However, this is something you should talk to an accountant or tax advisor about for guidance specific to your situation. Even if you are the sole shareholder of your C corporation, which means you own a 100% interest, you are exempt from personal liability for business debts and from a lawsuit, as long as you don't cross the corporate veil. Consultants tend to prefer LLCs. This is because they offer the flexibility of a small operation while protecting your assets.
However, forming and maintaining an LLC requires paperwork and fees. If you prefer not to worry about that, a sole proprietorship can come before you. S corporations are usually better suited for large consulting firms with several shareholders and employees. It provides the asset protection of an LLC, but imposes more liabilities on shareholders. Unless your consulting business is about to become a large company, a C corporation probably isn't right for you. They can be unnecessarily large and complex, and don't offer many advantages beyond those you can get with an LLC or S corporation.
As a result, single-member LLCs are often the best option for individual consultants. The work you are going to do for other companies is directly related to you, and can easily be attributed to an error on your part. Not having your personal assets involved will make the job less stressful. But either way, consider buying professional liability insurance to protect yourself in the event of legal liability. Here are 15 unique, new, and highly sought after consulting business ideas that can help you get started in no time.
Create a team of expert designers, no-code developers, and quality control professionals and create a platform where customers can address their programming and technology package creation needs. You can also focus on two or three industry-specific, no-code consultancies. If people love a brand's story, 55% are more likely to buy the product in the future, 44% will share the story, and 15% will buy it immediately. The correct positioning of the brand determines the progress and growth of any company.
Brands with consistent product positioning achieve a revenue increase of 10% to 20%. In a sole proprietorship, all business liabilities are liabilities of the owner; there is no separation between business, legal, or tax obligations between the owner and the company. Even if you decide to go with a sole proprietorship at first, you can choose to form a single-member LLC for your consulting business at any time. Now that we've reviewed the basics, let's describe three consulting business ideas that are currently in demand.
With the introduction of new technologies and digital transformation, companies are increasingly relying on consultants. An idea consultant creates a workspace and provides the most in-demand services to companies of all shapes and sizes. If you're about to open your doors and you just don't know where to start, the first thing you need to do is decide what type of consulting business will be right for you. Building in public is when consulting helps generate momentum for your client's business. The sole proprietorship is the simplest form of small business ownership because it's just about you and your personal (legal) name, with no separate identity for the company.
While similar to a sole proprietorship in that it has only one owner, a single-member LLC offers additional protections that protect you from business liabilities because your company is your own entity. However, if you want to offer consulting services under the name of A+ Consulting, you would have to create a sole proprietorship LLC or file a DBA (operating as such) for your sole proprietorship. There are consulting services for academia, law, engineering, business strategy, and more; the list goes on and on and follow. This can be a good structure for consulting firms, specifically because it can protect your personal assets, as long as you keep business and personal assets separate.
