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  1. #1

    Default Which Business Type is Best for Me

    I am in the process of setting up a consulting business in New York (Nassau County) to be exact but a majority of my work will be conducted for NYC customers and in NYC.

    I haven't yet obtained an EIN number and I haven't set it up yet but as soon as my semester ends on may 7th I will be sure to set it up. I am confused as to which type of business should I form? I am going to be more or less the only employee because this company will be a side business for me but I'd still like to set it up once and right because there is potential to expand.

    Which business type should I form? I am also concerned with not being personally liable for a mistake that I may make, hopefully this will NEVER be an issue but you never know who may sue you these days.

    Any help you could provide me with would be much appreciated. I did notice other posts of interest and I will be sure to use the search feature but I was hoping for a few quick tidbits that someone could provide.

  2. #2
    Join Date
    Sep 2005
    Behind a Desk

    Default Re: Which Business Type is Best for Me

    The business type that's "best for you" depends upon what you're doing and the associated risk. The standard approach to minimize the chances of personal liability is to form a traditional corporation; if it's small, usually an S Corp.

  3. #3
    Join Date
    Jul 2007

    Default Re: Which Business Type is Best for Me

    You may be a sole proprietor, an LLC, or a corporation. If you are the only party working in the business you may not get much in the way of limited liability because you cannot compel someone to sue your entity if you personally performed the work. For example, if I am a block layer and I build a block wall that falls on someone and kills them, I can't force that person's family to sue my LLC or Corporation. They can sue me personally and take my personal assets because I'm the one who did the work that caused the loss.

    From a tax perspective, an LLC gives you the greatest flexibility because it can file its tax return on your personal tax return as a Schedule C, or it can elect to be taxed as a corporation (and subsequently as a Subchapter S corporation) if you wish. In either case, the LLC is a simpler entity to administer than a corporation of any kind.

  4. #4
    Join Date
    Mar 2008

    Default Re: Which Business Type is Best for Me

    I'm from NYC, had several businesses through the years. I have to agree that if you are the sole employee doing the work, then, you'd be sued anyway if something went wrong.

    From the sound of it, you're a college student, or recent graduate, and unless you have loads of money in the bank, your lack of any assets may well be the best defense against lawsuits.

    With my first business, while still in college, I did it as a simple proprietorship, but through a DBA, which is the simplist and cheapest way to do it. This would allow the business to look and sound more professional without all the requirements of LLC's, S Corps and so forth.

    And if the business grows, and you need an LLC or S Corp, simply have these entities take over your DBA, and continue. Your don't have to encumber yourself so early on, if you don't know how things will pan out.

    With a proprietorship though, and with NYC clients, I know people who got snagged big time with the "NYC Unincorporated Income tax", meaning you owe NYC 4% of your income, even though you don't live or have an office here. People generally don't know about it, and the city usually finds it out through NY State tax returns. A friend of mine doing loan origination consulting got hit for back taxes and fines going back some 4 or 5 years for failure to file.

    As to LLC's, they are offer nice flexibility, but there's an additional "publication requirement" that makes it a pain to set up. And there's a minimum franchise tax involved if your LLC is not making any money. S Corps also has minimum franchise taxes as well.

  5. #5

    Default Re: Which Business Type is Best for Me

    Thank you for replying. So I should apply for my EIN number with a business name as: (first name) (last name) D/B/A (company name) Consulting? How exactly will I be personally protected? I will be the lone employee for now in the hopes of expanding but I am not sure how thing's will work out.

    I am married with three children, work full time (the new business would be a business on the side), and go to nursing school nights and weekends. How would I be personally protected? Not that I have much in savings or personal assets but I just want to make sure that I am personally protected.

    Thanks in advance.

  6. #6
    Join Date
    Mar 2008

    Default Re: Which Business Type is Best for Me

    NO, no separate EIN needed.

    For a proprietorship, and with a DBA going with it, you'll just use your own SS#. I recall, for a single member LLC, you use your own SS#, though you have the option of getting a separate EIN# in that case.

    You'll need the DBA to set up bank accounts where you'll deposit payments when your clients pay you, and then your SS# is used as the EIN# when you do this.

    As to being personally protected, having done consulting myself, establish a solid relation with your clients, and do good work. If you set up an LLC, and really mess up, and you did the work yourself, the client will sue the LLC AND you. Also, you can try buying "general liability" insurance, though as someone new starting out, whether you'll can get any is an issue.

    I bought a business from an S Corp seller, and allegedly they installed tires improperly, and after I took over, I received at our business a complaint and summons against his "S Corp", and also against him and his wife personally. Fortunately, for them at that point, they took the money, and already moved to Florida. In FL, your entire homestead is out of reach of creditors, whereas in NY, it's not.

    My wife was a banker, did SBA loans, and she tells me for most people in your position, they put the house and bank accounts under the wife's name only, and the business assets under the husband's name only, so if the business really messes up, they can't come after the house. For the bank however, they would go for a guaranty from the wife though, so you can't just run away with the money.

    More sophisticated methods involve putting money and assets in trusts. If you put as much as you can into 401K's IRA's, certain types of insurance, annuities, these assets are in trusts, and they are beyond the reach of creditors as well.

  7. #7
    Join Date
    Mar 2008

    Default Re: Which Business Type is Best for Me

    I mentioned briefly above about mitigating risks with your clients as a consultant, namely doing the job well. There are many different types of consulting, but I'll highlight some issues based on my experience, and explain what I mean.

    You can be a "by the hour consulting subcontractor". I was a project manager at a large firm, and I track the work and progress for them. Not much reason for my company to squawk as we define the project, track it on a day by day bases. The only big issue is some of them cannot meet project deadlines, and we have the option to cut them off right then and there.

    So, there's no big risk here.

    I also did freelance consulting by the project, somewhat fixed price, to deliver a product, and here you can get into trouble. For me, I was consulting on my own doing projects before being "project manager" managing consultants, and there's quite a lot I would have done differently, if I was project manager first.

    First, often clients call you to do a project, and often, they have a vague idea of what they need. What you have to do is present a project plan, with a discernable scope, of what you want to accomplish. Usually though, as the project goes underway, clients find they need more items added to the scope of the project, and you'll need to be able to refer back to the original scope to redefine the project, re-do your estimates, or even tell them you do not specialize in these additional issues, and you'll have to add a consultant of your own.

    This is called "scope creep". and you'll need to manage it well.

    Finally, on completion, the consultant will obtain the client's acceptance, and then offer support services. This is spelled out separately, and you'll have to make sure this is also handled well.

    I had a project where a consultant delivered customized software tracking commodity trading for a small scale operation. There are larger, but unaffordable packages, so we had someone deliver a scaled down affordable product for us.

    On acceptance, the consultant added in that the software is "licensed for use up to so many partners". I told the guy I didn't recall discussing this issue during the project, and asked why the restriction.

    He reminded us that we did, we asked for a "scaled down package" for a small scale operation. He said it is not inconceivble that a firm of our size and resources can in the future acquire a "General Motor's sized" operation, and then expect the software to work perfectly for that too. The product will not work then. This is his way of limiting the size and use of the product.

    He said his product will work well even if it went a bit beyond the scale it was licensed for, he will not be asking for more money if we did, but he simply wanted to limit his liability, so he won't be blamed if the product didn't work as advertised, i.e a product desgined for 100 partners did not work for 10,000.

    This I see are the risks. If you don't know what you're doing, can't manage the projects and client expectations well, then don't expect to hide behind "LLC's" and "S Corps".

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