By Michele Leonelli, Esq. | Phocus Law
For many of our friends and members at AZREIA, real estate investing is a side hustle. This means that folks often have a primary occupation, or that they have several gigs on the go. Among the most common of these non-real estate occupations are consulting companies. We’ve worked with a host of consulting companies along the entire lifecycle of their businesses: from setup to sale. In this article, we’ll explore the three main topics to consider in setting up your consulting business.
While setting up a consulting business can feel daunting, 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.
Choose The Right Legal Entity
When creating your consulting business, the most important decision is the first: which legal entity will you choose for your business? For those AZREIA readers that have followed some of our earlier articles, this will be old hat but the most common three 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 — we typically 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.
Determine Your Hiring Strategy
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. We recommend asking a few salient questions here 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, it’s worth 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.
Bring In the Right Kind of Clients & Use the Right Contract(s)
Once you have 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 (MSA), or a Sale of Services Agreement, (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. Ideally, you’d draft one MSA that you use throughout a client relationship, supplementing with SOWs when necessary.
A good 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. As my partner, Mick is fond of saying, “An ounce of prevention equals a pound of cure.”
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.
The above is only some of the issues we routinely handle for our consultant clients. So, if you’ve started a consulting business, or if you’re looking to get one going, don’t hesitate to reach out to me directly for more help: email@example.com. I work with a variety of consulting businesses across different industries, and I’d love to help you with yours!