How to Start a Consulting Firm
How to Start a Consulting Firm
A consultant is considered an expert in a particular field who may work as an advisor either to a company or another individual. The nature of advisory would depend on the sector that the consultant is involved in and the scope of work. Consultants are an important part of any business. In the last decade, U.S. businesses spent over 15 Billion dollars on consulting assignments alone. The advent of technology and the growth of specialised consulting firms like McKinsey, Boston Consulting Group etc. has enabled the consulting business to become a niche field in itself.
Why do organisations hire consultants?
A consultant is hired for his or her expertise in a particular field. Hence, a high level of competency along with a good track record is essential. The track record/ experience of the consultant may matter a lot depending on his field, for example, hiring fundraising consultants are general on the basis of their track record. If an NGO wants to hire a consultant to raise a million dollars, it only makes sense to hire an expert who has already done so for other companies.
Problem identification is another area. Large organisations find it difficult to get to the root of a problem that may have adverse effects on their operations or strategy. In this case, bringing consultants for pinpointing the issue and suggest solutions. Supplementing the staff many be another reason to hire a consultant as a business can save thousands of dollars a month by hiring consultants than hiring full-time employees as consultants don’t have to be paid benefits. A consultant may act as a catalyst to bring in change without bothering about the company culture, employee morale etc. especially when there is a reorganisation. They may also be hired to train and teach corporate staff, to impart diverse skillets, to create new business divisions and set the ball rolling so management can take over eventually.
The following are the things to consider while starting your own consulting firm.
Registration for Consultants
A consultancy can be started on an individual basis as a sole proprietorship firm or a limited liability partnership if there are 2 or more partners. The consultant can practice on an individual’s name as well. However, in the case of individual practice, if a specific taxable service is provided and the aggregate value of the service exceeds Rs. 20 Lakh during the financial year, then the consultant is liable for GST registration and must get registration for the same. To ensure that the business name, brand and logo are protected, registration under Trademark with Trademark Registrar under Trade Marks Act, 1999 is required. A market survey prior to the registration would ensure that the same/ similar log is not already in use in the market.
It does not matter if the consultancy is run in the individual’s name or as a proprietorship firm from a tax point of view. unlike a partnership firm or a private limited company which has a separate legal identity and thus a separate tax entity, the sole proprietorship firm and the sole proprietor are considered the same entity legally and tax assessment will do in the name of the individual. The individual’s PAN card may also be quoted for the proprietorship firm in business dealings as there is no legal need to avail a separate one for the firm.
Certifications and Licences for Consultants
Certifications would depend on the field that the consultant chooses to practice in. For example, web programmers need to get certifications from respective recognised IT institutes/ organisations. Finance consultants such as chartered accountants or cost accountants would need licenses from ICAI. If a consultant is selling mutual funds, it requires registration with AMFI. IRDA registration is required to sell insurance. To import/ export goods/ services, it requires a registration code from IEC (Import Export Code).
Locations and Employees
A consulting business would not require a huge upfront capital initially. However, location and hiring can require a significant sum. Operating the business from home initially could be an option until covering some ground. This affords many added benefits like flexibility, tax benefits apart from the obvious saving on costs. However, as the business expands and employees have inducted to the firm, then it requires bigger space and better location.
Income and billing
Billing comes with a catch 22 situation as the business will not be successful if the consultant charges too little and it will be difficult to get clients if he charges too much. One way to help decide charges would be to look at the competition’s prices. An entity which provides similar services could help determine prices. To account for unforeseen expenses, a miscellaneous line item could be added for contingency. Although it do not require to mention the exact amount for contingency, it requires an upfront approximation.
There are several options while setting rates including hourly rates, project fees and working on a retainer ship basis. Certain clients may prefer to be billed on an hourly basis while others may prefer project-based lumpsum payment. A consultant generally gets a fixed amount for a certain period of time (quarterly or bi-quarterly) while working on a project rate basis. A retainer can set monthly fees based on the availability of work for an agreed-upon number of hours for the client. Working on a retainer ship basis has its advantages as there will be guaranteed income every month since cash flows could be a problem when the business is new and just gaining traction.
In India, the consultant’s income is taxable under the head ‘Income from Business or Profession’ and hence, it entitles to all expenses for the purpose of running the practise such as rent, travel expenses, depreciation on the property including cars, computers etc., telephone, stationery and printing etc. TDS for consultants @10 per cent is deducted under 194J (TDS on professional or technical services).
Marketing and Advertisement
It is essential to advertise in magazines/ trade journals depending on the types of services. For example, an architecture consultant may advertise in magazines such as ‘Architectural Digest’ or ‘Inside Outside’ and even showcase some work for maximum visibility. A consultancy may also publish articles in an established newsletter or start their own newsletter as it an effective means of communication within trade circles. Publishing a newsletter would also be a great way to stay updated on trade news as it would involve research.