If you got laid off, you might be considering becoming a consultant after a layoff. A lot of people find this route a great way to bridge a gap between employment. You may even fall in love with it. Being a consultant comes with a lot of its own perks. You set your hours. You report to no one but your clients. And, you get wonderful flexibility.
Despite how attractive it may sound, there are also some downsides to being on your own. The main issue is never knowing for sure you’ll get your next paycheck. Additionally, you’re in charge of far more aspects of the business than you were before. When you work for a company, they handle your accounting, payroll, compliance, etc. When you’re on your own, it’s all on you.
This article will be covering the how-to aspect of going consultant after a layoff. Let’s get to it.
Can You Consultant After a Layoff?
First and foremost, it’s important to double check your previous contracts to make sure you’re not violating a valid noncompete. Not all noncompetes are valid and not all provisions in a severance agreement or otherwise can be enforced.
Below, you’re find a series of considerations from formations through contracts and more. I highly recommend you check out NC.Business for a lot of great advice about getting your company off the ground. Additionally, you buy my book Check Mark Startup for a step-by-step guide on creating a new business with a solid foundation.
Forming An Entity
The first thing you need to consider is what type of entity you might want, if any. The obvious choice is LLC, so that’s where I typically start the conversation. LLCs are the most flexible entity type, especially for sole member companies. There are few reasons you might want a corporation, like for insurance purposes. We won’t cover those because it’s a much more complicated discussion.
That leaves the choice between LLC and no entity at all. There are two main differences between operating under an LLC versus a sole proprietorship. Firstly, you have taxes. By default, a single member LLC and a sole proprietorship are taxed the same. However, you can elect different tax treatments depending on your situation in an LLC. That might be beneficial to you.
Secondly, you have liability. An LLC protects your personal assets from certain liabilities like contracts, partners, employees, and some professional actions. However, you’d also need insurance and a great contract to move the bulk of your liability over to just the LLC. This limited liability nature is not automatic. It requires you follow the proper formalities and write into your contracts that the liability is solely with the LLC.
Furthermore, not all forms of liability can be transferred to the LLC. If you do something yourself, by default you can be personally liable. However, some (but not all) forms of that liability can be transferred through the use of contracts and waivers. In North Carolina, most professional actions like those of a doctor or lawyer, cannot be disclaimed personally. Therefore, if you’re a professional, this type of liability will still fall on you. Get good insurance!
Contracts
Whether you set up a separate legal entity or not, you’re going to want strong protective contracts that you can reuse as you gain more customers. Getting the right contract for you requires time, patience, and skill, so we’re only covering the basics in this article. We also won’t cover what exactly a contract is, but we’ve gone over similar topics in the past.
For your consultant business, your contract should cover the following:
- Price;
- Service to be performed;
- Limits on scope creep and how to add that in for extra payment;
- Termination clause;
- Limitation of Liability;
- Who owns the intellectual property; and
- What happens if either party breaches the contract, including attorney fees.
Every contract should also include certain boilerplate like where a lawsuit can happen, but since they don’t vary much between industries and fields, there’s no point in diving too deep into those.
Furthermore, you should also include anything you’re worried about. For example, if you’re worried about someone reselling your design, put limits on that in the contract. No two situations are exactly alike, so there’s no one contract for every consultant.
Other Business Aspects
A good business has a good foundation. Therefore, you need certain other backend things. You should have a bank account and some way to keep track of your accounting. Make sure you have all the software and hardware you need to run your business in place from the start. Getting caught up once the clients come rolling in is inefficient and impractical.