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Be.a.successfull.consultant

Be.a.successfull.consultant

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This onestep ^ choosingagoaland stickingtoit ^ 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.

Soleproprietorships/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-

dayoperations 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.

66 / Be a Successful Consultant

Establishing Your Business Direction / 67

Foul!

Manyindividuals,whohaveworkedtogetherverysuccessfullyinacorporation,failwhenthey

try toworktogether aspartners.Thereareavarietyofreasons for this

1. Whenworking inanorganization, the paymentisnotdependentontheworking

relationship.Often partnersdivide becausethereisnot enoughbusiness forboth

partners: onecangenerate business,butcan’tdothework.The othercan dothework,

butcannotgenerate business.This createsill-feeling betweenthem.

2. Working inaformalorganizationstructure,therearede¢nedstandardsandprocedures.

Working inapartnership,individualshavetode¢netheirownstructureandtheymay

approachthisprocessdi¡erently.

3. Ifthe partnersare notclear whende¢ning rolesandresponsibilities,itcanresultin

frustrationanddisappointmentbetween partnersbecause othersare not‘doingtheir

job’.

4. Workingtogether,‘ontop ofeachother’, is di¡erentfromworking inanorganization

wherethereare otherindividualspresent.

So think carefully before you make this large commitment. Lawyers may tend to make more

money frompartnershipsthanindividualsdo!

Limitedcompanies

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

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.
You can use personal pension schemes to
reduce tax liability.
Often, if you work from home, you reduce
travel time and expenses. When you do travel

for the client you get these costs reimbursed.
This is the simplest structure when working
independently.
Lower administrative overheads.
Taxes can be self-assessed.
Less taxes.
If you are making losses initially you can
deduct these against any taxes you are paying

on full-time employment.

You are responsible for tracking costs
and revenue and filing tax returns bi-

annually.
You pay National Insurance
Contribution but you are not eligible to

claim unemployment benefits.
If you are sick, or have illness in the
family, your business may be exposed

and you may have inadequate financial

resources.
Less credibility as a sole trader (may be
perceived that way).
May have to guarantee personal loans
because of less ‘business presence’.
As a business owner you may be liable
for losses and debts.

Partnership

Advantages

Disadvantages

You have someone else to ask difficult
questions.
You have someone else who shares tax
liability.

Apart from the complexity of deciding
separate tax bills there are no

disadvantages.

Limited company

Advantages

Disadvantages

There is a limit to corporation tax on profits
up to £200,000.
Company pension schemes for ‘owner
directors’ are more generous in terms of tax

relief than for an individual.
Advantage can be made of additional business
deductions such as company cars, although

these are less present now than previously.
Greater credibility associated with being a
limited company (possibly).
Banks may be willing to provide a loan
without a personal guarantee.
Directors are not personally liable for
company losses.

There are more stringent reporting
requirements than a sole trader.
Higher taxes.
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 Choosingyourconsulting business structure

Take a moment and think about the different ways of structuring your business:

sole trader

partnership

limited company.

Review the advantages and possible disadvantages of each structure.

Think about your business, which structure will you select?

What are the advantages of this structure and how will you make sure you benefit

from them?

What could be the possible risks associated with that structure and how could you

overcome these?

Coaching point

Ifyouarejustgettingstartedandarenotsurewhichstructureyouwanttouse,beginwithsole

trader. It requires very little set-up time or administrative overhead, it is legal and you can

evaluatethis decisionlater.

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.

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