When I first started thinking about moving from being an employee of a consulting company to going out on my own as an independent consultant, I had a lot of questions about the exact mechanics of getting up and running.
So here is part one of the top list of critical decisions to make when starting as an independent consultant or freelancer.
Much of this falls into the boring but important category, but hey, being your own boss isn’t all glitz and glamour (but it sure has a lot of great benefits!).
Note that this list comes from my own perspective as an HR/Management consultant in Australia, and of course I’m not an Accountant. There is no substitute for checking out all these and other issues yourself and making the decision that is right for you and your business.
From where will you work?
When first starting out on your own and building up a steady client base it makes sense to keep your fixed costs as low as possible, so therefore basing yourself from home is a sensible way of keeping operating costs (and commute time) to a minimum. Plus, most consultants will spend a reasonable proportion of time working at client sites so why go to the unnecessary expense of renting an office?
You may also wish to consider becoming a member of a co-working space. This gives you a third space from which to work and can be helpful if you need to get away from distractions at home, want to break up your routine, meet new people, and have a base in a central location for when you’re going to and from client meetings.
Most co-working spaces have a range of packages from full-time membership to a day a week, or even just pay as you go casual usage.
People often ask if independent consultants need a “proper” office for having client meetings, but the majority of client meetings happen at their premises or at venues like coffee shops.
Whether to consult, contract or freelance?
While the semantics of what each term means isn’t important, you will need to decide whether you primarily work as a consultant, freelancer or contractor. This will also help potential clients understand how you might work with their business.
A contractor typically provides their services to one organisation at a time for an extended period (say anywhere from a few months to a year or more). This provides the advantage of security of income and often means working on an interesting project from start to finish.
Note it is important to distinguish between whether you wish to be a contractor who provides services to another business that you invoice for the work, or being an employee who is engaged on a fixed term employment contract (that’s a whole other blog post). It is also important to ensure that you meet the criteria as a genuine contractor before engaging with a client, as there can be taxation and industrial relations implications of getting this wrong.
A consultant will typically work for multiple clients at the same time and often provides very specialist advice and services. Consultants’ daily or hourly rates will usually be higher than those of contractors which is in part because their utilisation (chargeable hours as a proportion of total available working hours) will be lower.
A freelancer will also typically work for multiple clients at the same time but provide very specific services (often associated with graphic design, writing and other such creative services).
What type of business structure to use?
The two main business structure choices when going out on your own are sole trader or a company (of course if you team up with others then partnership is also an option).
Setting up your business as a company means that it is a clean self-contained entity and that any debts or losses pertain to the entity only, and not you personally. However it costs more to establish and maintain a company structure and the on-going accounting and reporting requirements are generally greater.
Commencing as a sole trader is relatively easy once you obtain an Australian Business Number (ABN) under which to operate and is less onerous in terms of on-going reporting and administration requirements. However, your own personal assets may be at risk should you be sued in relation to your business activity or pursued over business debts.
When dipping your toe in the water when establishing your business, you may consider starting out as a sole trader and then potentially moving to a company structure later on should it be the right fit.
There is plenty of information out there on pros and cons of company structures – this is a good starting point.
What to call your business?
Even if you choose to start out as a sole trader you need to consider what business name to use. Do you wish to simply be your name (i.e. John Smith), a variation on that (i.e. John Smith and Associates) or something completely different (e.g. Acme Consulting)?
You may want to simply use your name or a variation if you have a strong profile in your industry but there can be a lot of value in operating under a business name that helps position and brand your company and its services – even if it is solely you providing them for now!
Under either structure you should devise a trading name that your entity will be known as and register that name (unless as a sole trader the trading name is your exact first then last name - then you don't need to register the business name). However you should note that registering a business name does not necessarily provide exclusive trading rights over that business name – it’s complicated!
For more details see the ASIC site.
Whether or not to register for GST?
If you operate your business in Australia you have to determine whether or not you need to register for the Goods and Services Tax (GST).
Here’s what the Australian Taxation Office says about it:
“You must register for GST if you run a business or enterprise and your GST turnover is $75,000 or more ($150,000 or more for non-profit organisations).”
This is a tricky area, as when you start your consulting business you have no idea of your earnings for the year ahead. But the turnover threshold of $75,000 means that most independent consultants and freelancers will need to register for GST. Once registered you then need to charge GST on services provided, collect it from clients through the invoicing process, and pass it on to the Government at regular intervals (quarterly for most).
So, there are a lot of critical decisions to make in setting up your own freelance consulting business – and they are not all straight forward. It's hard work but also a lot of fun as you get your business moving from a dream to a concept to a reality.