Starting Your Digital Consulting Agency: 3 Key Business Considerations
The business world is going digital at lightning speed. This means the need for digital consultants is growing just as fast. Do you think you would like to form your own digital consulting firm to take advantage of this growth? You know the consulting part of the business, but what about the rest? What are the other things you should be thinking about as you take on this new adventure?
Some things to consider are what type of legal business structure you will use? Will you have a partner? Will you have employees? What are the tax implications of these decisions?
Two things to think about when choosing a legal structure are liability and taxation. The common forms of business are Sole Proprietorship, Partnership, Corporation and LLC. Each has its own advantages and disadvantages. A sole proprietorship means the business has one owner and it does not typically provide any liability protection for its owner. A partnership has two or more owners but does not provide liability protection. Both of these entities are considered pass through entities, meaning all the profits and losses of the businesses are passed through to the owners for tax purposes and reported on the owners’ personal returns.
A corporation is an entity separate from its owners, and bears all of the liability as well as the tax burden. The last form is an LLC, which is a hybrid of the partnership and corporation. The business bears all liability but the profits are passed through to the owners.
The next thing to consider is whether you are going to have employees, contractors or both. What is the difference? If a worker is considered a contractor you merely contract with them on a per project basis, or some other type of agreement, and you pay them a contract wage. You are not required to withhold any payroll taxes. You also do not need to consider unemployment taxes. At the end of the year, if you paid the contractor over $600 you would need to issue a 1099 form showing the total pay for the year. This form also gets filed with the IRS.
On the other hand, if your worker is considered an employee, then you would pay them a regular wage and withhold payroll taxes. You would also want to register with the state unemployment agency. At the end of the tax year you will need to issue your employee a W-2.
For both types of pay it may be advantageous to use a payroll service, such as Gusto, to ensure you comply with all of the state and federal withholding and filing requirements.
The new tax laws implemented in 2018 have been very favorable for all types of businesses. If you choose to be a C corp, the tax rate on your business has decreased.
For pass through entities, all business income is passed through to the owners and the tax burden is also passed onto the owner. The new tax laws have classified pass through income as “Qualified Business Income”. This means that you will be allowed an extra deduction (Section 199A) based on the qualified business income.
The initial set up of a business can seem overwhelming. Your accountant can help you choose the best structure and advise you about employees, accounting and payroll software, and your tax filing. Seek help from your accountant on these details so you can focus on building your digital consulting firm.