Starting a Simple Consulting Business

A few years ago I wrote up some of what I learned as a programming consultant/contractor in Finding Success as a Game Development Contractor with a focus on finding and completing work as a contractor. A few people have asked me about the legal and business aspects of being a software consultant, so I thought I would write a guide to how I created my (very simple) business without spending a lot of money. The process to start a business varies based on where you live, but the general steps here should be the same for anyone starting a simple business in the United States. So, how did I create and maintain a legal business entity?

Creating a Simple LLC

There are multiple ways to organize a small consulting business, ranging from a very simple Sole Proprietorship up to a proper Corporation. After doing some online research, I decided to use a single-member LLC (Limited Liability Company), which is a business that is legally separate from the owner but is treated as identical for tax purposes. I’ve been happy with this setup and I do think it was the correct choice for my situation. Here are some advantages to this setup:

• Unlike a sole proprietorship, the Limited Liability bit means that if your business loses money and cannot pay back loans, your personal finances are mostly protected. This isn’t a huge deal for software consulting (and the liability protection doesn’t always apply), but it definitely helps with peace of mind.
• With a single-member (or pass-through) LLC, the federal/state government treats company income the same way it treats income from other personal sources. This means your taxes will be simpler (and often lower) than with other types of companies.
• I have worked for small and large companies with very different policies, and a simple LLC is very flexible. Some large companies only want to work with other companies and may require official business information for some sort of complicated Procurement process. As I own a company, I can fulfill those requirements myself and do not need to pay a % of my income to an intermediate agency (which may be a good idea for other reasons). For these companies I can sign and fulfill contracts as a legal representative of my company.
• Smaller companies (and larger ones outside the US) usually prefer to hire and pay individuals. This is totally fine as a single-member LLC. For these companies I can sign contracts as an individual but have them pay my LLC’s business account.

How do you actually create an LLC in the first place? The process depends on what state you live in. This is fairly simple in my state of North Carolina, so I used LegalZoom instead of a proper lawyer to prepare my paperwork. They were fine but I wouldn’t recommend them over any of the other companies that offer the same service. They helped me file the correct forms for initial registration and for requesting an Employer Identification Number. The base rate they charged to prepare and submit my paperwork was reasonable when I used them a few years ago, but they tried to get me to sign up for services that I absolutely did not need as a simple LLC.

For example, they wanted to act as my Registered Agent for several hundred dollars per year. I did this for the first year because I was confused by the process, but literally all they did was forward business mail to my personal address. The second year I just set the company’s Registered Agent to be… me which is free and simple because I live in North Carolina. If you don’t live in the state you register your company in, there are other services that will handle this for less money.

They also wanted to handle the filing of my Annual Report for hundreds of dollars, but in North Carolina this is a simple process that you can easily do yourself online. After the somewhat complicated initial setup, maintaining my business as a legal entity only costs me $200 and a few hours of work per year. Every March as part of my tax preparation, I go to the NC website and file an updated annual report. I just need to check a few boxes on their online form, pay the registration fee, and move on with my life.

Setting Up a Bank Account

While doing my initial research, everything I read said that it was important to have a separate business bank account. This was intimidating at the time, but it was honestly pretty easy and was absolutely worth it. It is important to keep your business finances separate from your personal finances for a few different reasons:

• The Limited Liability protection only applies if you can prove that you treat your LLC like an actual company and not as part of your personal finances. Having a separate business bank account and maintaining consistent accounting records is the easiest way to do this.
• Having a proper business banking account means you can access different types of loans and benefits that are not available to personal bank accounts. I have never used these options (and I do get a bit more junk mail) but it’s nice to know they are available.
• Paying business expenses from your business bank account makes it much easier to prepare your taxes and manage your personal budget. I have separate business credit and debit cards that I use to buy things like computer hardware, which I can then claim as business expenses.

So how do you set up a business account? The easiest option is to talk to the same bank you use for personal finances. Most banks offer business services and if you already have a personal account they have proof of your ability to pay bills on time. I waited until the business and Employer Identification Number process was fully completed, then I called a local branch (Bank of America for me) and set up an appointment to open a business account. The bank representative walked me through that process which only took a few hours. After that was setup, I used the bank website to set up within-bank account transfers which I use to quickly send money between my two accounts with no fee.

Once you have your business account set up, you need a process for accounting and invoicing. I looked at a few different options, and I decided to go with Wave which I have been happy with. The exact plan I used is no longer available to new customers, but I set it up to automatically import transactions from my business bank account. I use their simple invoice tool to create invoices for my consulting jobs and then send the invoices to my personal email as PDFs which I send to my clients (often using some other site). I do NOT recommend having Wave or another 3rd party directly send invoices to your clients, as they encourage the clients to use online payment options that can have pretty high fees. I don’t know if Wave is the best option for new accounts these days, but it’s definitely worth it to sign up for some sort of small business accounting website.

Handling Taxes and Health Care

The most complicated part of owning my own business has definitely been taxes and health care, and I pay professionals to make sure this is done properly. I used to file my own taxes, but that is harder with the extra complexity of owning a business. I recommend hiring an actual accountant instead of trying to use one of the cheap tax prep services. I started this by emailing a local accountant after tax season (they’re very busy before that) and set up an initial consultation (which may be free) to talk through the process. You need to talk to a professional in your state to confirm things, but here is how the basic process works:

• You will pay significantly more taxes than you would as an employee. One big difference is that because of the overly complicated tax/healthcare system in the US, employers (including owners of a single-person LLC) pay half of the Medicare and Social Security taxes. So, to start with you will need to pay double the total of SS/Medicare contributions that are listed on your pay stub as an employee.
• You will probably need to pay quarterly estimated taxes. When you are self employed, no tax is withheld from your paycheck so you need to pay the government yourself. They want some of this money before the end of the tax year, so you need to pay a portion of your taxes every 3 months. My accountant estimates my taxes for next year as part of filing, and then I use the online tools to pay every quarter.
• You only need to pay taxes on Business Income. This is equal to what you are paid by clients, minus any business expenses and most health care expenses. As a game dev consultant I don’t have many business expenses, but I do deduct things like web hosting and computer hardware. I do this by exporting all of the business transactions from Wave and sending it to my accountant at tax time, who then makes sure the expenses are legally deductible before filling in the tax forms.

Most of my income tax deductions are from health care, and the rules here are definitely Complicated (like everything with healthcare in America). Generally you can deduct health care expenses “in your name” which includes the premiums for the (mediocre) HSA marketplace insurance I have right now. I was surprised during my first year of self employment because COBRA premiums are not fully deductible for technical reasons. I also have a High Deductible Health Plan so I can access the tax benefits of a Health Savings Account which are definitely worth it for me. But, the rules for health care taxes depend on your individual situation. I was confused last year when they canceled my old HSA plan, so I reached out to a Health Insurance Agent who helped talk me through my options.

Basic To Do List

If you’re like me, all of the things above sound like a lot of work. This is partially true, and it took me a month of part-time work to set everything up in the beginning. But now it’s easy to maintain my business and it has been worth the effort for me personally. I am definitely NOT an expert so you should treat all of my advice with a grain of salt, but it will be easier if you understand the basic process before starting. So, if you want to start a simple consulting company here’s an ordered list of things to do:

1. Figure out the name, concept and branding for your company. Make sure that your desired company name is not already taken in your area
2. Work with a lawyer or service like LegalZoom to file the initial paperwork to create an LLC in your state. The specific options will depend on the state and type of work you will be doing. You might want to get an Employer Identification Number
3. Figure out your rough tax and health care plans, talking to professionals to help you make complicated decisions. Save up money for taxes
4. Set up a business bank account once your company is created
5. At this point you can officially start working as your company. Before this, you should sign contracts and accept payment as an individual
6. Set up a basic accounting process using something like Wave or hire an actual accountant. Categorize your business expenses as they happen
7. At tax time, work with an accountant to prepare and file your taxes and plan for next year
8. File the updated paperwork you need to for the year, including the annual report and any other forms needed for your location

That should cover the basics, at least from my experience of owning an LLC based in North Carolina. If I’m seriously wrong about a topic or forgot something important, please leave a comment. Good luck with your future endeavors as a small business owner!