Types of Business Model to Consider as a Business Consultant

Several factors come into play as you decide the legal structure for your consulting business. Choosing the correct business model helps you to mitigate risk and be better prepared. In this context, we will explain the various business models, and you will make a choice, based on your own situation. The majority of most beginning consultants and new business owners start out as an individual or a small group of consultants, and the typical business structure choice is the limited liability company. We will discuss business structures, business opportunities, and business plans.

Let's begin with a brief discussion of the common types of business structures available to business owners. There are five main factors that will influence your decision on which structure to use. These are:

  • Legal liability. This is the amount of risk or potential your business has for liability.
  • Tax implications. This includes your business goals and the structured desired to maximize your growth and minimize your tax burden.
  • The level of flexibility. This you desire in your ownership structure for both short- and long-term goals.
  • Future needs for the growth of your company after the startup phase.
  • Administrative time required to ensure your liability protection.

Sole Proprietorships are the most basic business form. A sole proprietorship is a business owned and operated by one owner, who is in total control. In this type of structure, the entrepreneur goes into business alone, or with employees, but without any co-owners. There is only one owner in this situation.

Pros: It is easy to establish; you have full control of business decisions, you own all the profits, few legal restrictions, and no Worker's Compensation requirements.

Cons: You are personally liable for business debts; startup financing may be difficult; you have no employment benefits; and you are responsible for business failure.

General Partnerships are a legal business form where two or more persons go into business for profit as co-owners and share the profits and losses. A partnership is the association of two or more co-owners carrying on business for profit. Partners have unlimited personal liability for partnership debts. The partnership is managed, typically, though a partnership agreement. This form of business has a pass-through tax treatment, where all income and expense items pass through to the individual partners.

Pros: As a limited partner, your personal assets are not at risk from creditors; the limited partnership is easy to establish; it is easier for the partnership to get financing; there is more than one person to share startup expenses; and partners share all the profits and benefits.

Cons: The partnership may be difficult to end; a partnership is more expensive to set up initially; the loss of a partner may dissolve the business; the general partner is exposed to unlimited liability for the business.

Limited Liability Companies are a business structure that combines limited liability provided by a corporation, with pass-through partnership tax treatment.

Pros: Owners can participate in the management of the business; the limited liability company is easier to operate; profits and losses go through the company to the owners for tax purposes; personal assets are protected; and there are no limits on the number of owners.

Cons: Limited liability companies are recognized differently in each state and require legal assistance to set up and structure. Some professional organizations and consultants are prohibited from registering as a limited liability companies, such as doctors, lawyers, and accountants.

Corporations are a business form driven by by-laws and shareholder agreements. Corporations are the most formalized type of business structures. Corporation ownership is typically founded on shares of stock. There is no limit to the number of stockholders, and each stockholder's personal assets are protected by the corporation. The by-laws contain the specific procedures concerning employment positions of the corporation, procedures for the shareholders, and how meetings are held. The shareholder agreements are documents that contain information on the transfer of ownership for shares, how to resolve issues between shareholders, how to establish the price of stock shares, and how shares can be bought and sold.

Pros: Corporations have an endless lifespan; personal assets are protected from business liabilities; ownership of a corporation can be changed without affecting the day-to-day operations; it is easy to raise capital through the sale of stock.

Cons: Incorporation involves larger startup expenses; the corporate charter governs activities of the corporation; corporations are subject to more federal laws and taxes; corporations have more legal formalities.

The majority of new consulting businesses are structured under the limited liability company. The next most commonly used structure is the partnership. If you have chosen the basic business structure, you will next need to develop your own business model. This should be relatively straightforward if you are the sole consultant for your business. Once you begin employing other consultants, you need to develop a business model for how they will contribute to your company.

After you choose your business model, there are four ways you can start in consulting: as an employee of a consulting firm, as a subcontractor for a consulting firm, is a part-time consultant or as a full-time consultant.

  • Consulting firm employee

  • Consulting firm subcontractor

  • Part-time consultant

  • Full-time consultant

Consulting firm employee

There are many opportunities available with large and small consulting companies. These large companies will channel your expertise, as an employee, to provide client services. This is a very competitive business, as consulting companies focus on acquiring the best talent. Many of these large consulting companies offer significant salary bases structured above $100,000, and employees are eligible for bonuses on top of their salary. There are a number of Fortune 500 consulting companies you can work for. The Big Four in the United States includes PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG. There is an increasing number of information technology consulting firms. Many of these firms offer boutique services that specialize in a specific industry or functional line, such as research or technical support.

You may have interest in smaller firms, which have many of the advantages of national firms, as far as structure of business operations. A benefit of working with the smaller firm is that you would have a greater experience in a wider variety of task in a shorter time frame, as the firm is more likely to have a fewer number of employees. Smaller firms may also have less pressure, and more opportunity for variety.

The benefits of large consulting companies include:

  • You can focus solely on providing consulting services.

  • Someone else takes care of accounting and tax issues.

  • You may have secretarial support.

The downside of large consulting companies includes:

  • Significant pressure

  • Requirement to "sell" services

  • Little flexibility in developing your own direction

  • No experience in the independent consulting world

Consulting firm subcontractor

As a consulting firm contractor, you would work on a contract basis to fill in gaps where consultants are needed. This may be a good opportunity for you.

The benefits of consulting as a subcontractor include:

  • Flexibility with employment

  • Exposure to a number of consulting experiences

  • Developing an understanding of the consulting market

  • Affording you time to work on your own consulting business

The downside of consulting as a subcontractor include:

  • Less job security

  • Uncertainty of work opportunities

Part-time consultant

Interested in learning more? Why not take an online Business Consulting course?

You may find it more attractive to work as a part-time consultant until you are able to get a full-time consulting business off the ground.

The benefits of being a part-time consultant include:

  • You can keep your day job until you're ready to take the plunge.

  • You can control your schedule.

  • You get an idea of what you're up against.

The downside of consulting as a part-time consultant include:

  • Lack of exposure to what it would be like in a full-time consulting career

  • Less income

  • Fewer experiences

Full-time consultant

You may find the most attractive option to be a full-time consultant, and only you can determine when this time will be.

The benefits of consulting full time include:

  • You make all the decisions.

  • You get all the recognition.

  • You're doing what you truly want to do.

The downside of consulting full time includes:

  • You assume all the risk.

  • You are responsible for all the expenses.

  • You have no one with whom to discuss ideas or concerns.

There is no doubt the consulting industry is strong and growing stronger every day. As you choose the business model, you need to think of what you want to gain personally, and what your goals are. Some of the starting points when you choose your business model are to list on paper your current situation and the advantages and disadvantages of a consulting business. Look at the items you have listed as a disadvantage and see if there is a mitigation possible. This reduces your risk as a business owner. Next, you want to define and describe exactly what you want to provide as a consultant. Determine what your core services will be.

If you have chosen consulting as your next big adventure, there are numerous factors that go into this decision, including a desire for greater independence; a desire to be your own boss; the enjoyment you get from networking, and from solving clients' problems.

Once you have determined the legal structure and reviewed the options, you probably have some idea of the size of business you want now, and in the future.
Consultants most commonly choose to work by themselves, or with a small group. You will want to develop a business plan that outlines how your consulting firm will be managed. The business plan will also be necessary if you are trying to obtain funding for your business. This is the general framework you would develop for your business plan:
  • The executive summary, which tells what type of consulting you will perform, and what type of activities your consulting firm will do

  • Your mission statement, including your goals, objectives, and values

  • The business model or business strategy, which tells how your company operates, what is different about your operations, and explains your services, staffing, and marketing

  • Market analysis of your specific consulting niche and potential clients

  • Opportunities, which goes hand-in-hand with your mission and values

  • Marketing and sales plan, including how you will market your services and expand your business

  • Management of the business, which may include a section on your own experience, education, and expertise

  • Financing for your debt structure, explaining how you will financially support the business

As you develop your business plan, you will review the skills and experience you bring to your consulting business, determine what legal structure to use, determine what type insurance coverage, compensation, equipment and supplies you will need. It's almost like having another full-time job!

As a new consultant, you want to have a good feel about your identity as a consultant, and you need specific content and process skills. Content skills means that you have the technical expertise clients will pay for. Process skills are those needed to run a consulting business. You have to have the ability to manage, market, and grow your business. Do you have these traits?

· Reliability

· Creativity

· Independence

· Initiative

· Commitment

· Vision

· Competitiveness

· Goal oriented

· High-energy

· Persistent

· Hard-working

· Integrity

· Innovative

· Problem-solving

· Risk taker

· Failure tolerant

Starting Small

One thing to consider is the necessity for errors and omissions insurance. Another is how many employees you will have. Do you plan on beginning a consulting business for yourself, or are you going to enlist the help of other colleagues who have complementary skills?

Here are some aspects to look at from an employment perspective:

  • Will you hire full- or part-time employees to assist with consulting?

  • Will you hire contract employees to assist with consulting?

  • Will you hire additional employees to perform administrative functions, as well as marketing, accounting, or legal services?

Here are some things to look at from an operations perspective:

  • Will you work from your home, or will your require office space and office equipment?

  • Will you need a business phone, website, business cards, letterhead, computers, printers, faxes?

Here are some things to look at from a business initiation perspective:

  • Do you have a marketing framework?

  • Standard business forms?

  • Templates for consulting contracts?

  • Internet content?

  • Marketing materials?

  • How much consulting will you do initially?

  • What services will you offer?

You will determine the scope of the consulting services you will offer in the form of consulting packages. Clients may hire you for a multitude of services. You may be asked to design a project. You may be asked to serve as a catalyst for change. You may be asked to supplement their existing staff on a short-term basis. Based on their needs and their "possible" needs, you should have some "pre-marketed" or "pre-packaged" options to offer clients, such as:

"Three weeks of consulting for implementation of an ISO 9001 program $6960.

Additional reports (50 page) $1081.

Additional hour of consulting $48."

Determining these types of offerings are part of choosing a business model. If your business model includes working with a partner or a group of employees, here are some of the structures you could use within your consulting business.

Analyst consultants are highly qualified individual contributors.

Associate consultants contribute individually at a high level and manage small projects.

Principal consultants serve as an industry, or functional, expert -- or as senior project directors.

Senior principle consultants have a high level of consulting experience, displaying at least 20 years of industry experience in a diverse project management background.

After you determine the structure for your consultants, you want to develop your compensation structure. This will most often be based on the client's company size, the type of company, and the number of operating locations they have. Your employees will be either paid at a fixed fee, or by the hour.

Here is some sample pricing you may see for the above structured consultants:

  • Analyst $40-$75 an hour, plus expenses

  • Associate $70-$100 an hour plus expenses

  • Principal $95-$165 an hour, plus expenses

  • Senior Principal $160-$200 an hour an hour, plus expenses

Summary Reminders and Takeaways

There are a number of considerations regarding the legal structure of your consulting business. The structure is based entirely on your specific needs. Consulting business owners have five main factors that influence their decision on how to structure their business. These include legal liability, which is the amount of risk your business has; tax implications, which affect how you grow your business and minimize tax burden; flexibility, which is the ownership structure you desire for the short- and long-term goals of your company; future needs, which include how you will begin your business, and the structure required once your business grows into a larger entity; and finally, administrative time, which equates to the time you spend protecting yourself and your company against liabilities.

Sole proprietorships are the most basic form of business, owned and operated by one owner who is in total control. The benefits are that it is easy to establish and has few legal restrictions. The downside is that you are personally liable for all business debts and the business failure. General partnerships are where two or more persons go into business as co-owners and share all the profits and losses. As a general partner, your personal assets are not at risk from creditors. Limited liability companies combine limited liability with specialized tax treatment. Owners participate in the management of the business with limited liability. The downside is some professional entities, such as doctors and lawyers, are prohibited from registering as a limit liability company. And finally, corporations are businesses centered around by-laws and shareholder agreements. Benefits are that corporations have an endless lifespan; the downside is that a corporation involves a large start-up expense.

You have several options to choose from to begin as a consultant: being a consulting firm employee, a consulting firm subcontractor, a part-time consultant, or a full-time consultant.

It is important that no matter what choice you make, you have a solid business plan -- a framework for you to operationally manage your business.