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A beginner's mistakes. Do I really need to register my consulting business?

Updated: Nov 25, 2021

You may be thinking, "As long as I pay my taxes, what's the difference?

What happens if you don't register your business?

You may think that you could just be a sole proprietor without registering your business. Maybe. Your state or your county may have a different view. They likely expect sole proprietors to be registered with them.

As you start out to establish your own consultancy, the simplest path seems best. Wouldn't it be easy to just be a sole proprietor? You send your client a note or simple invoice? Your client pays you by any method that's easy for both of you. You pay taxes on what you earn from the consultancy. Simple. Done!

Yes that's easy, but it's not the best way! You still should check what your state or county requires. You may be out of compliance with local regulations or laws.

Do I really need to register my business? While many people may establish a business without registering it, it is better to formally register it, using the best business structure for your requirements.

Why register your business as a Limited Liability Company (LLC) or a corporation?

When I started out, my area had substantial liability. I'm not a lawyer or an accountant, but for me a sole proprietorship was out. A sole proprietor has unlimited liability. A partnership was worse. I would have liability for both myself and a partner and no protection of my assets. An LLC or a corporation offers better asset protection.

So I was looking at a limited liability company (LLC) or a corporation. An LLC is simpler and more flexible, but I was leaning toward establishing a corporation.

I spoke with people who had the standard type of corporation, a C corporation. At the end of each year they were scrambling to balance out their income versus expenses to lower the amount of tax they would have to pay. C corporations have double taxation. As an owner, your C corporation itself would pay taxes, but you would also pay taxes on your earnings from the corporation.

An LLC can have pass through taxes to avoid double taxation for the LLC. This is if you file with the Internal Revenue Service to have the LLC regarded as an S corporation.

I had read about business structures, and an S corporation seemed best for me at the time rather than an LLC. An S corporation, unlike a C corporation but like an LLC, has pass through taxes. You can deduct your salary as a business expense.

What will you name your consulting business?

Before I registered my consulting business, I checked online if the name I wanted for my business was already owned by someone else. It didn't turn up anywhere. I also did searches on domain names to see whether the name I wanted was available. It was. So, I bought domain names.

Now, how do you register your business?

I decided to go with LegalZoom based on the cost and simplicity. I could have used MyCorporation or the many other services that were advertised online. Another way would have been to have a lawyer or accountant do that for me, but it would cost more. You should still have a lawyer and accountant check that your LLC or corporation has been formed correctly.

Why LegalZoom? At the time they advertised extensively and I was familiar with them and their story. I had looked at their website and the services, and they had a thorough approach. Nowadays, you can get legal help from LegalZoom, too.

If you decide to register your by yourself, on the Nav website see a list of all the business licensing requirements by state. Here is the link for Utah, which was provided on that site.

Many of the sources that I read suggested getting registered in a state that had no business tax, such as Delaware. They also suggested that it would be better to register in a state, such as Nevada, which allowed business owners to remain anonymous and that it might provide more legal protection for the business.

My employer at the time did not object to employees consulting on the side. Still I thought it might be better to register in a state that allowed the owners of companies to remain anonymous rather than my home state, because my employer did not require me to clear it with them. It was on me to make sure that it didn't interfere with my work and that there was no conflict of interest.

Since my employer did not require any details or formal process, I preferred to keep it private. Then it seemed that it seemed that registration of my business in a state like Nevada would offer some additional legal protection. Also, I bought into the argument that it is better to be registered in a state that did not tax businesses.

This is where you learn from experience. My business was private, but after I made the transition, the privacy was less important to me. What I found was that my out-of-state registration put my business in the category of a "foreign" corporation. At first this was confusing. I didn't think that my business was foreign because it was in the United States not somewhere out of the country. Foreign just meant out of the state even if it was just another state and not another country.

As more business came in, I hired an accountant and he said, "Why are you registered out of state?" He was not impressed with the privacy, but mostly he focused on the taxes. He said that with a pass through tax, I would be paying taxes in my state anyway. Eventually I realized that I was dealing with reporting my business and paying annual registration fees in two states. It was more work and more money, and did nothing for the company's taxes.

Nevada kept increasing the annual fees for staying registered in the state. Also, in more recent times, there was a groundswell against nefarious shell corporations and especially LLCs conducting questionable business. The confidentiality around who owned businesses in Nevada relaxed and was eroded.

I finally ended up transferring my S corporation from Nevada to my home state, and it's no longer a "foreign" corporation. Then I found out one of the benefits of privacy and confidentiality that I had lost. An avalanche of junk mail to help me get my business started flooded my mailbox!

So it's important to get good professional advice early on from an accountant and a lawyer. It could help you to avoid costly or burdensome mistakes. Everyone makes mistakes, but that is how you learn. We can all make beginner's mistakes. It's important to just get started.

What to do after registering your business

When the business was registered, I went straight onto the Internal Revenue Service (IRS) website and applied for a tax identification number, and got a business account and credit card at my local bank. Then I set up a website, got a business phone and voice and data account. I found some free bookkeeping software. I applied at the IRS online to move from a C corporation to an S Corporation.

Final thoughts

In this post, I have given you a personal perspective. This is for better or worse how I started out to register my own consulting business.

Reading books, searching online, and asking questions of experts and people who have made the transition can only get you so far. Actually, taking steps to start up your business is where the rubber hits the road.

I'm not an accountant or a lawyer and what I have written here is no substitute at all for professional advice. My hope is that you may find my experience, especially my mistakes, helpful to you.

For information on getting started visit: https://www.consultsinfo.com/get-started

What are your thoughts and experiences?

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