Incorporating what's right for you.

We find that many of our consultant customers form an LLC or corporation to conduct, operate and manage their business in order to help protect their other assets from liabilities or lawsuits that might result from their business. If the corporation or LLC is formed and managed correctly and there is a claim or lawsuit relating to the business, then generally only the assets owned by the corporation or the LLC, and not the consultant's other personal assets, will be subject to the claim or lawsuit. In other words, customers may be able to limit their potential liability if there is a claim or lawsuit relating to their consultant business.

Although both an LLC and a corporation can help protect a business owner from liability, we find that many of our customers choose an LLC to conduct their consulting business. An LLC can offer more freedom in the conduct, operation and management of the business, and may not require some of the formalities usually required with a corporation, such as annual meetings of stockholders. In addition, an LLC may have tax advantages over a corporation. For example, an LLC with only one owner may not have to file a separate tax return and its profit or loss can be included on the owner's tax filing. In contrast, a corporation must file a separate tax return.

Many of our customers incorporate or form their LLC in the state where their company conducts the majority of its business. However, in deciding where to form a company, there are many factors to consider, such as the cost of formation, tax laws, and other laws governing the actions and liabilities of the LLC or corporation within each state. Another factor that our customers consider when forming a company in a given state is that the company may also have to qualify to do business in other states where it conducts business.

The costs of forming and qualifying a company to do business may be an important factor to consider in determining where to form the company. For example, if a consultant is considering forming a company in Delaware but all of its services are performed in or for clients located in New York, then the consultant may elect to form the company in New York (and not Delaware), and avoid the dual costs associated with forming the entity in Delaware and then qualifying that entity to do business in New York. Summary:

• Many of our consultant customers form an LLC or corporation to conduct, operate and manage their business to help protect their other assets from claims against their business.
• Many of our customers find that an LLC provides them with a simpler and more flexible way to protect their assets from claims that might result from their business.
• An LLC may have tax advantages over a corporation. For example, an LLC with one owner may not to have file a separate tax return and its profit or loss can be included in the owner's personal tax return. A corporation must file separate returns.
• In deciding where to form a company, there are many factors to take into account such as the cost of formation, tax laws, and other laws governing the operations of the LLC or corporation within each state.

We find that many of our consultant customers purchase and carry business insurance to provide liability and other protection for their business. Consultants often conclude that personal or homeowners insurance will not provide sufficient protection for even a small, home-based consulting business. Issues such as whether it is beneficial for the company to obtain business insurance, the type of insurance to obtain, and the appropriate amount of insurance coverage will vary significantly based on the activities of the consulting company.

There are many types of insurance that are available for a consulting business, including professional liability insurance to protect against claims for alleged negligent or otherwise deficient services. Also, a consulting company, especially if it has offices and employees, typically will obtain general business insurance to provide protection with regard to the types of claims common to all businesses, including property, workers' compensation, and liability claims. In addition, some of our customers acquire business interruption insurance, which provides coverage if the event that the company is forced to cease operations for a period of time due to certain events.

Whether or not the business insurance protects the company from claims made by clients in connection with advice or services that the company renders will depend on a number of factors, including the type of services rendered, the nature of the claim, and the terms and limits of the insurance coverage that the company has purchased. An insurance policy will provide protection only against certain claims, and may not cover all of the losses incurred by the company. In addition, the policy holder may be liable for any judgment that exceeds the coverage included in the insurance policy.

In light of the variety of risks that a consulting company may face and the many types of insurance available, we find that many of our customers seek the advice of a knowledgeable risk management professional or insurance agent in order to determine what types of insurance and amounts of coverage are appropriate for their consulting business.

Summary:

• Many of our consultant customers purchase and carry business insurance to provide protection for their business.
• Whether or not the company is protected against claims made by clients will depend on a number of factors, including the type of services rendered, the nature of the claim, and the terms and limits of the insurance coverage that the company has purchased.
• An insurance policy will provide protection against certain claims, but may not cover all claims or losses relating to the company.
• In light of the many types of insurance available, we find that many of our customers seek the advice of a knowledgeable risk management professional or insurance agent in order to determine what types of insurance and amounts of coverage are appropriate for their consulting business.

Workers' Compensation is a system created by each of the states to provide benefits to workers who are injured while working. The benefits may include medical care, temporary disability payments, and compensation for permanent impairments.

Workers' Compensation laws vary significantly by state, and whether a company is required to obtain Workers' Compensation insurance will depend upon the statutory law of the state where the work is being performed. Generally, if a company has one or more employees, it will be required to obtain and maintain Workers' Compensation insurance for its employees.

A company's contractors or subcontractors are not generally covered by a company's Workers' Compensation insurance.

For your convenience and reference, our web site lists each state and its Workers' Compensation rules. Learn about Workers' Compensation in your area.

Summary:

• Workers' Compensation is a system created by each of the states to provide benefits to workers who are injured while working.
• Whether Workers' Compensation insurance is required will depend upon the statutory law of the state where the work is being performed. If a company has one or more employees, the company will typically be required to obtain and maintain Worker's Compensation insurance.
• A company's subcontractors are not generally covered by a company's Workers' Compensation insurance.

If a company does business in a state other that the state in which it was formed, it will likely have to register or "qualify" to do business in that state. The LLC or corporation is often referred to as a "foreign" LLC or corporation in states other than the state in which it was formed. Whether or not the company must qualify in a particular state depends upon the laws of that state, which may vary from state to state. Also, a company may have to obtain a separate business license to conduct business in certain states or municipalities. Once again, whether or not the company will be required to obtain a separate business license will be determined by the laws of the state or municipality involved.

Generally, qualifying a company to do business in a state other than its state of formation is similar to the formation process, and the LLC or corporation may be required to pay filing fees and provide certain information and documentation to the state. Also, if a company is required to qualify to do business in a state but fails to do so, it may be subject to penalties.

Summary:

• If a company does business in a state other that the state in which it was formed, it will likely have qualify to do business in that state.
• Generally, qualifying a company to do business in another state is similar to the formation process, and the LLC or corporation may be required to pay filing fees and provide certain information and documentation to the state.

Whether or not a company must file separate tax returns in a state where it performs services, and/or pay taxes directly to that state, depends on the state tax laws and the company's operations in that particular state. Many states require companies that perform services in the state to file a separate tax return and pay taxes directly to that state based upon the services that the company provides to clients in that state. Additionally, states may allow a credit for taxes paid to other states with regard to income from services performed in those other states.

Generally, in determining whether or not a consulting company must file tax returns or pay taxes to a particular state, the state may consider the connection or "nexus" that the company has to the state. In making such a determination, states typically consider factors such as the frequency and magnitude of services the company provides in a particular state or for clients in a particular state, or whether the company has a physical presence in a particular state, such as employees who conduct business activities or an office located in that state.

It is important to note that whether or not a company must file a tax return in a specific state is not necessarily determined by whether that company is required to register or qualify to do business in that state. For example, a company may not be required to qualify to do business in a state, but could nonetheless be required to file a tax return.

The amount of income that must be reported, permissible deductions, tax rates, required tax forms, and tax-filing dates may differ significantly by state. In light of the differences in the tax laws between the states, we find that many of our consultant customers hire qualified tax professionals to provide tax advice and prepare the company's tax filings in each of the states where required.

Summary:

• Whether or not a company must file separate tax returns in a state where it performs services, and/or pay taxes directly to that state, depends on the tax laws of that particular state.
• Whether or not a company must file separate tax returns in a state where it performs services is not necessarily determined by whether the company must register or qualify to do business in that state.
• In light of the differences in the tax laws of each state, we find that many of our consultant customers hire qualified tax professionals to provide tax advice and prepare the company's tax filings in each of the states where required.

As a general matter, there are numerous factors that may be relevant in determining whether a person is deemed an outside contractor, rather than an employee of the company. For example, it may be helpful to demonstrate that the contractor: (i ) works at his or her own facilities; (ii) does not require training from the company to perform the required services; (iii) maintains the authority to control how the work is performed; and (iv) has been retained for a specific project rather than on a long-term basis. It may also be helpful to establish that the contractor provides services to entities other than the company, and is paid a flat fee, rather than an hourly wage, for the services performed for the company.

We find that many of our consultant customers enter into agreements with contractors that explicitly state that the contractor is an independent, outside contractor, and that the contractor (and not the company) shall be obligated to pay all payroll and related taxes relating to services provided to the company by the contractor.

In addition, we understand that some of our customers attempt to ensure that their contractors will be considered independent contractors, and not employees of the company, by requiring the contractors to be incorporated or organized as a limited liability company, and also requiring that the contractors actually employ the individuals performing the services. If a contractor is a corporation or a limited liability company with its own employees, it may be more likely that its workers will be considered the contractor's employees and not the company's employees.

Even after taking the above steps, if a company too closely supervises or controls the work done by its contractor, the contractor (or the contractor's employees) may be deemed to be the company's employees.

A company typically will need to be concerned with payroll tax implications when it has employees. Generally, employers are required to withhold income, social security and state and federal unemployment taxes on the wages it pays to its employees. Due to the numerous rules and required filings with regard to payroll and related taxes, and the state and federal penalties that may be imposed for failure to comply, we find that many of our consultant customers hire tax professionals to provide tax advice and prepare the necessary tax filings on behalf of the company.

Summary:

• There are numerous factors that may be relevant in determining whether a person is deemed an outside contractor, rather than an employee of the company. Most of the factors relate to the amount of control that the company exercises over the conduct of the contractor.
• One way that our customers help to ensure that their contractors are considered contractors and not company employees is to require their contractors to be incorporated or organized as a limited liability company and to further require their contractors to actually employ the workers performing the services.
• Some customers enter into agreements with contractors that explicitly state that the contractor is an independent, outside contractor, and that the contractor (and not the company) shall be obligated to pay all payroll and related taxes relating to the services provided.
• Generally, an employer is required to withhold income, social security and unemployment taxes on the wages it pays to its employees.

Many of our consultant customers rely on the traditional marketing methods. In speaking with our consultant customers, we have seen marketing success in utilizing brochures, outbound calling, newsletters, and advertising. Industry resources indicate that that keeping brochures simple and to the point are very effective. Brochures should address several key points such as what service you offer, why you are an expert in those services, a few compelling reason why you should be hired, some biographical information and testimonial from other clients.

Since most consulting businesses start as a result of an individual's expertise in a subject matter, it is important to promote that expertise. Many of our consultant customers seek out public speaking engagements at local association meetings and corporate events to demonstrate their knowledge. Other consultant customers have started their own company newsletter to promote their expertise.

With the emerging technologies of today's business world, many of our consultant customers have selected blogging as their method for promoting their expertise. The Company Corporation has partnered with Six Apart, a technology company that offers blogging software. Six Apart will help boost your business with their TypePad blog. By promoting your expertise by blogging and establishing yourself as a thought leader, you can help grow your consulting business. To learn more, click here.