P.Mean: Business aspects of an independent statistical consultant (created 2008-07-28).

I'm learning quite a bit about the business issues associated with a new career as an independent statistical consultant. Here are some of the issues I've had to confront. My apologies to the many readers of this website from other countries, but these issues are mostly specific to the United States.

Type of business. There are several types of business entities. The simplest is a sole proprietorship.

A sole proprietorship, or simply proprietorship (British English: sole trader) is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietorship in the sense that the owner has no partners. A sole proprietorship essentially refers to a natural person (individual) doing business in his or her own name and in which there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship does not have to be concerned with double taxation, as a corporate entity would have to. A sole proprietor may do business with a trade name other than his or her legal name. In some jurisdictions, for example the United States, the sole proprietor is required to register the trade name or "Doing Business As" with a government agency. This also allows the proprietor to open a business account with banking institutions.-- en.wikipedia.org/wiki/Sole_proprietorship

Another choice is a Limited Liability Company. It has much of the simplicity of a sole prioprietorship, but provides some level of liability protection.

A limited liability company (abbreviated L.L.C. or LLC) in the law of the vast majority of the states of the United States is a legal form of business company offering limited liability to its owners. Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having characteristics of both a corporation and a partnership. It is often more flexible, the owners have limited liability for the actions and debts of the company, and it is suitable for smaller companies with a single owner. The primary corporate characteristic is limited liability while the primary partnership characteristic is the availability of pass-through income taxation. -- en.wikipedia.org/wiki/Limited_liability_company

A third possibility is an S corporation. In many ways, it is treated like a formal corporation, but the tax

S-corp, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S Corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. -- en.wikipedia.org/wiki/S_corporation

In contrast, a C corporation files its own tax returns under the Internal Revenue Service tax code for corporations.

I'm in this alone, but for some consulting arrangements involving more than one person, a partnership may be appropriate.

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation. -- en.wikipedia.org/wiki/Partnership

There are advantages and disadvantages to each of these entities, and you should discuss these with a lawyer with expertise in small business. It may certainly be appropriate to start out with a simple business entity, and then transition to a more complex entity as your business grows and changes.

Insurance needs. When you work for yourself, you have to make sure you have appropriate insurance coverage. A good time to investigate this is while you are still working at your previous job. Some of the insurance coverage that your job provides can be carried over if you plan carefully in advance. Other insurance coverage needs to be replaced when you make the jump to independent consulting. There are several types of insurance coverage that you should think about (but my list is not intended to be exhaustive).

You should discuss your insurance needs with a financial consultant or independent insurance agent.

Retirement plans. There are several options available to a self-employed consultant.

Taxation. Your income from statistical consulting is handled on different tax forms than income from a salary. The actual tax form used changes depending on what type of business you have.

Creative Commons License This work is licensed under a Creative Commons Attribution 3.0 United States License. This page was written by Steve Simon and was last modified on 2010-04-01. Need more information? I have a page with general help resources. You can also browse for pages similar to this one at Category: Professional details.