How to start a small consulting business
Two months ago I made a big and very terrifying decision: to start offering consulting/fractional/freelance services in operations and marketing. In that two months I've gotten a ton messages asking about the "how to". I'm not pretending to be an expert—I'm just getting started! But here's a quick summary of what I’ve learned and the steps I’ve taken.
Getting set up: registration, banking, and record-keeping
Decide what kind of financial entity you want to be. The basic choices here are acting as an independent contractor who's paid with a 1099 or creating a business that's registered as an LLC or an S-corp. A 1099 means you can get checks just written to you without creating a business entity. An LLC or S-corp means creating a business, which can offer you some tax advantages and legal protections. Either way, you'll need to budget to pay the taxes on your income, because it won't be withheld.
I decided to go the small business route because some of the prospective customers I was meeting with preferred working with a business entity. I started with an LLC, but my accountant has already recommended transitioning to an S corp based on the amount of income I expect to make in 2024. If you want to pay yourself a regular salary or if you plan to hire other people, you'll need an S corp. You'll want to talk to a tax professional about how much income you expect to make and your other plans for your business to make sure you're in the right setup.
If you decide to form a business entity, you'll need a few simple registrations:
Articles of organization: File with your state (as either an LLC or S corp). This took me about 15 minutes to complete, and I received the completed docs a few days later.
EIN: Request an Employer Identification Number from the IRS. Complete an online form and immediately get the EIN. Another 10-15 minutes.
Bank account: Highly recommended by folks I talked to! Get a separate bank account for your business so you can easily track business income and expenses without mixing them with your personal assets. You'll need to get the articles of organization and EIN first to create a business bank account. This took about an hour at a local bank.
You'll also need a plan for bookkeeping - keeping records of expenses and income, and invoicing customers. Some folks just keep track in a Google Spreadsheet! I chose to get a Quickbooks subscription ($12/month) to get more automated reporting and be able to easily sync records with my accountant. I know a lot of folks love Freshbooks as well.
Other professionals
I've consulted with two other professionals to get work started: an accountant and a lawyer. Neither were very expensive for initial discussions. The accountant gave me basic advice on setting up Quickbooks and planning for paying estimated taxes on a quarterly basis. The lawyer provided me with a contract template I can use with my customers.
Health insurance
Many prospective small business folks avoid taking the leap into freelancing or starting their own business because they’re not sure how they’ll source health insurance. This is, obviously, a concern primarily for Americans, and it’s a travesty. That said, my husband and I are buying health insurance affordably through the federal healthcare exchange: healthcare.gov. You can shop for different health plans and pay rates that are subsidized based on your income level.
Tip: work with a local insurance broker to select and set up your plan. They have tons of experience navigating the exchange, understanding the difference between plans, and can help you move forward efficiently. The federal healthcare exchange does not include dental or vision plans, so this is only helpful for general health plans, but I’m grateful for the opportunity to access insurance plans we can afford.
Billing strategy
The most challenging step for me has been figuring out how much and how to charge for my services. After talking with other consultants/small business owners, here are my recommendations:
Start by figuring out how much income you need to make over the course of the year (cash, not counting taxes)
Then figure out how many billable hours you expect to have available. Remember that even if you plan to work 40 hours a week, it's unlikely all of that time will be focused on client work. You'll need to allocate time for administrative work and business development - meeting with prospective clients, marketing your services, etc. You'll also need to allocate time for your own vacations.
Use those data points to figure out an hourly billable rate (divide income by number of billable hours). Then adjust this up by at least 10% to budget for self employment taxes (discuss this rate with your accountant! I'm just giving you a guesstimate here.)
For ongoing engagements, plan to bill by retainer (a fixed monthly amount based on an estimated number of hours available). This gives you and the client the most flexibility.
Business development
Finally, you'll need to find some clients. Here are a few strategies for building your client pipeline:
Build a platform: You'll need a way for folks to get in touch with you. This does not need to be a website! Some folks use LinkedIn, Substacks, Instagram, or a presence on a directory as their business development platform. My friend Sarah Eadie, an amazing product marketing consultant, uses LinkedIn, for example. Think about what you're comfortable with, what you can easily update, and start very very small.
Reach out to your network: Make a list of all the folks you know in any types of related businesses, organizations, etc. Reach out to them to let them know you're getting started in seeking freelance/consulting clients. Give them a pre-written email they can forward to their own networks.
Put yourself out there: I want to state for the record that I hate putting myself out there. I'm an ambivert, and interacting with strangers is really hard for me. But as I build up a business, I am setting myself a goal of doing some form of outreach once a week. And sure enough, I've noticed that by sharing social media content, reaching out to folks in my network, or attending networking events, I get a flurry of contacts in response each time. So set a goal and take the leap.
Other questions? Send me an email and I'll do my best to help. Advice on what I can do better? PLEASE send me an email. I'd appreciate it.
