Getting Started With Software Consulting
This is a part of the Consulting Lessons Learned series. Read this as opinionated suggestions from a friend over drinks, not expert advice.
Who Is This For?
This post is for people who check all these boxes:
- With at least 2 years of experience shipping software
- Want to start their own consulting practice
- US clients
- Sole owner of the business
- No employees
I find it much easier to write when I have specific people in mind. This one is for Michael and Melanie.
Set up an LLC
It is easy to do, doesn't cost much, and gives you a lot of benefits such as limited liability, appearing more professional to your clients, and better accounting.
I think a full-blown "C Corporation" is over-kill for a one-person consulting shop, as it adds a lot of accounting overhead, has double-taxation, and you aren't going to take on investors anyway. But it's possible that you have some special circumstance that makes it advantageous to you. I'm just not able to imagine why.
I don't see any harm in using one of those online incorporation services like Stripe Atlas or Legal Zoom, especially if you do some research and inform yourself of the options. I still suggest using a competent lawyer for incorporation. It cost me $1600, all included. It was worth it just for the peace of mind of knowing that I did it right. I also knew a lot less about this back then, so the guidance was reassuring.
Stripe Atlas seems take care of most the steps by even setting up a bank account for you etc. But I haven't used them, so I don't have first hand experience to form an opinion. I haven't used Legal Zoom either.
Choosing a Laywer and an Accountant
- They should be referred by a trusted friend
- That friend should've used their services for a few years
- If getting a referal is impossible, online reviews can be a starting point
- Meet. They'll usually take the first meeting for free. You should like them.
- The lawyer should offer fixed-rate service for incorporation
These steps are useful whenever you need to hire a professional in a field you don't have enough competence in to evaluate the hire, not just for hiring lawyers and accountants. This won't guarantee that you'll find the best, of course, but you'll probably avoid the worst.
Delaware is popular for incorporation because of their well-tested corporate-friendly case law. If you're starting a startup planning to take investment some day, then that's where you'd want to incorporate. But I don't see the benefit for a single member LLC software consultancy.
I live and work in California. My clients are California companies. So I have to pay the $800/year California Francise Tax anyway. So it didn't make sense to incorporate in some other state and pay their francise tax, as well as that of California. So I incorporated here.
Read up on the following to be able to ask your lawyer and accountant more informed questions:
- Member-managed LLC vs manager-managed LLC. You want the first.
- S Corp election and its potentially better tax treatment, if you're eligible
Make Accounting Easier
If you maintain good books, you'll not tear your hair out while filing taxes, and you'll not miss any tax-deductible business expense.
- Open a separate bank account and credit card. This is as simple as walking into your bank, after you have your incorporation paperwork and tax id, and walking out 30 minutes later.
- Put all business expenses, and only business expenses, on that credit card
- Use QuickBooks Online
These steps may seem onerous now. But it doesn't take long, and it is just a one-time time-investment with a lot of benefits.