How to start a consulting business in the US: the setup steps in order

The launch order at a glance

Each step depends on the one before it. Your bank will ask for your registration papers and tax ID, and your contracts should name the business that's actually doing the work. Doing things in this order saves you redoing paperwork.

1. Choose a business structure

The SBA lists the main US structures: sole proprietorship, partnership, LLC, corporation (including the S corporation tax election) and cooperative. Most solo consultants choose between a sole proprietorship and a single-member LLC.

A sole proprietorship is easy to start, but the SBA explains that your business and personal assets aren't legally separate, so you can be held personally liable for business debts. An LLC generally shields personal assets such as your home and savings, and profits still pass through to your personal tax return. Some owners later elect S corporation tax treatment, which has its own IRS filing and rules.

The right choice depends on your state's fees, your risk and your income. This guide is general information, not legal or tax advice. Rules change and depend on your state and situation, so check with a lawyer or tax professional before you act.

2. Register, get your EIN and check licences

The SBA says that if you work under your own legal name as a sole proprietor, you may not need to register anywhere, but you'd miss some legal and tax benefits. LLCs and corporations usually register with each state where they do business, generally through the Secretary of State. An LLC needs a registered agent in that state. If you use a trading name that isn't your legal name, most states require you to register it as a DBA ("doing business as").

Next, get an Employer Identification Number (EIN). The IRS says it's free and takes minutes online, and warns to beware of websites that charge for one. Banks and many clients will ask for it, and it means you don't have to give clients your Social Security number.

Most consulting doesn't need a special licence, but some work does. The SBA notes that states regulate a broader range of activities than the federal government, and that cities and counties can add their own rules. If your advice touches regulated areas such as investments, law, tax representation, engineering or healthcare, check the licensing rules for that field before you take the work.

3. Get insured before your first engagement

The SBA describes professional liability insurance as cover for losses from professional mistakes, carelessness or malpractice, for businesses that provide services. For a consultant, that's the policy that responds if a client says your advice cost them money. Some clients ask for proof of it before they sign.

General liability covers injury or property damage to others and is worth asking about if you visit client sites. If you work from home, the SBA notes a home-based business rider on your homeowner's policy may cover a small amount of business equipment. An independent broker can compare policies for your field.

4. Use a written agreement for every client

A clear engagement letter prevents most client disputes before they start. Have a lawyer draft one template you can reuse, then fill in the details for each client.

• Scope: what you'll do, what you'll deliver and by when.
• What's not included, and how changes to scope are priced.
• Fees, deposit, invoice dates and payment terms.
• Who owns the work you create, and what you may reuse.
• Confidentiality, and how you'll handle the client's data.
• Limits on liability, and how either side can end the agreement.

5. Open a business bank account and set up your books

The SBA recommends keeping business money separate from personal money, partly for liability protection and partly because it looks professional to clients. Banks usually ask for your EIN (or Social Security number for a sole proprietor), formation documents and any business licence.

Choose bookkeeping software on day one and connect your business account to it. Keep receipts and invoices as you go; catching up at tax time takes far longer.

Plan for tax from your first invoice. The IRS sets self-employment tax at 15.3% (12.4% Social Security and 2.9% Medicare) once your net earnings from self-employment reach $400. Individuals who expect to owe $1,000 or more generally must make estimated tax payments, in four payment periods across the year. Many consultants move a fixed share of every payment into a separate tax account.

After the paperwork: the launch itself

Registration makes you a business. Clients still need to find you, understand what you offer and trust you enough to reply. That means a clear offer with prices, a website that explains who you help, complete profiles, and a plan to reach the people who already know your work.

Business Launch Authority's Business Launch System covers that part: your offer, website, Google profile, launch announcement and a customer plan, reviewed by an expert. You handle the legal and tax setup with your own advisers.

Questions

Sources

• U.S. Small Business Administration: Choose a business structure
• U.S. Small Business Administration: Register your business
• IRS: Get an employer identification number
• U.S. Small Business Administration: Apply for licenses and permits
• U.S. Small Business Administration: Get business insurance
• U.S. Small Business Administration: Open a business bank account
• IRS: Self-employment tax (Social Security and Medicare taxes)
• IRS: Estimated taxes

General information, not legal, tax or financial advice. Rules differ by location; check with your own adviser.