Going it alone: Independent IT consulting
Published: Mar 10, 2009
Many people incorporate themselves in order to do consulting work. Having a company can help people be noticed in the market. Small groups of people can form a corporation to pool their resources and revenue, as well as limit their liability and taxes. Individuals can incorporate themselves as well. In that case, having a company web site or company portfolio draws attention away from the fact that only one person will be providing services.
There are a few types of small businesses that individuals can form. Individuals may become an S-Corporation (S-Corp) or a Limited Liability Corporation (LLC). People may also create Partnerships, which are unincorporated business organizations. People usually consult with a lawyer or accountant in choosing which type of business entity they should form.
In order to incorporate any type of business, one must choose a U.S. state to incorporate in, elect company officers and stockholders, and file the corporation with the state. While it is possible to do all the legwork oneself, most people hire lawyers or companies that specialize in incorporating. This usually costs a couple hundred dollars. The process does not require a lawyer, although having one to oversee the process may be helpful.
An S-Corp is a small corporation with less than 75 shareholders. An S-Corp member is only liable for the amount they invest in the company. Individuals who want to create an S-Corp must choose a President, Treasurer, and Secretary to run the company. Of course, in most states, one person can hold all of these titles in the same company. People can create an S-Corp in one state while conducting business in another. Thus, many people across the country incorporate in Delaware for its low taxes and liberal laws and policies concerning corporations.
In a partnership, at least two people manage the business as general partners, sharing company profit, liability, and debt equally. Partners report their shares of profit or loss on individual tax returns.
LLC's combine the limited liability of an S-Corp with the tax methods of a partnership. As in an S-Corp, only one person is needed to form an LLC, and people incorporated in one state can usually do business in another state. Many people favor incorporating their LLC's in certain states like Delaware for their liberal corporate laws and policies.
The work for independent consultants
A lot of IT work exists for individuals taking consulting contracts under $100,000. Most independent consulting contracts come from non-tech, small to medium sized commerce companies.
Consultants on this level get lots of different types of work. If a hiring company does not have enough money to update its computer systems, the company may hire consultants to maintain, repair, or operate the legacy systems. When a medium-sized company has enough capital to expand, they usually hire small consultant companies to create e-commerce web sites, databases, internal networks, or medium-scale content management systems.
Independent consultants should be comfortable working with older operating systems and applications. They should also have experience installing and supporting medium-scale networks, office utility applications, and database-driven web sites. Consultants should have experience in technical writing, since they are expected to give lots of technical documentation to the hiring company.
Independent consultants also help companies as analysts. As stated earlier, there used to be a glut of under-qualified consultants, and many companies used to waste resources on bad consulting advice and products. Now, those same companies are looking for people who can phase out the bad legacy products and systems.
"A good example of this is in the content management field. There's a huge trend where companies buy a content management product, and it never even gets implemented," explains John Running, CEO of MobiusWEB, an independent consulting company that creates databases, version-control software, and web sites. "Either the product wasn't implemented properly, or whoever sold it didn't focus on meeting the customer's needs."
"I realized that the thing to do is to spend more time interviewing the people who would use the software, and stay inexpensive," explains Running. "I sold a content management system to the American Ballet Theater this way. Big consulting firms charge insane amounts of money to spend time talking to the customers. The hiring companies are much better off talking to a small consultant like you."
Medium sized companies usually pay consultants around $30,000 to $100,000 to create or replace software and system solutions. In a slow economy, companies are likely to scale back on six-figure projects, but they will probably continue to outsource for smaller IT projects. Large consulting firms usually do not bother at all with contracts under $50,000, so independent consulting firms can find lots of business in this market.
"IBM isn't going to go after a thirty or forty thousand dollar project. But there's an awful lot of companies out there who need thirty and forty thousand dollar projects done," says Brad Smith, Vice President of Research for Consulting Magazine. "So, the smaller niche firms who have very little overhead, and can act very nimbly, and cost competitively, are going to succeed in this sort of environment."
However, hiring companies only want to hire consultants with proven track records. Thus, new consultants who do not have portfolios or business references usually have to work for smaller contracts under $10,000. Companies that hire these green consultants are usually new themselves, and do not have the capital to go with more experienced consultants. These customers may be hard to work with, as they still need to get their own bearings together. Consultants here must learn how to deal with customers quickly if they want to make a good impression and gain professional references. Beginner consultants may have to scrape for business in this manner for a year or two before they have enough credentials to catch the attention of larger companies.