I am giving a presentation on the business essentials that you need to know before you start a career in independent statistical consulting. Here is a summary of what I’ll be talking about.
A career as an independent statistical consulting is very rewarding, but it demands that you pick up many new business and legal skills, skills that you probably didn’t learn in graduate school. We will review the administrative details in setting up a new business, including accounting, insurance, contracts and billing. This is not intended as a substitute for talking to a professional accountant and a lawyer, but should help you become aware of the issues and questions that you need to raise with them.
My career in statistical consulting started in the 1970’s as a student consultant at the U Iowa. In the 1980’s, I spent one summer as a faculty consultant at Bowling Green State University. In the 1990’s, I became a government consultant and started getting a few independent clients. In the early 2000’s, I had to tell people, sorry, I’m too busy. But in 2008, I decided to quit my job and set up an independent consulting business, P.Mean consulting. I also found a part-time faculty position in the Department of Biomedical and Health Informatics at the University of Missouri-Kansas City.
When I started my own consulting business, there were no obvious guides written by statisticians on how to do this, so I started documenting things and presented these at various conferences and on the web. I’ve also gotten a lot of advice along the way from other independent statistical consultants.
So how has my consulting business turned out? If you measure the success of my consulting business by the amount of money I’ve earned, I would barely get a passing grade. If you measure the success of my consulting business by how happy it has made me, I would get an A+.
What do I like about consulting? You are your own boss. You are in control of your schedule and can refuse to work with certain clients without any penalty. You can actively seek work in areas you find interesting.
Before I start describing some basic business essentials, I should offer two warnings. First, there are way too many people who will tell you exactly what you need to do to set up a career in independent consulting. I am not one of those people. Every person’s situation is different and what works for one person may not work for another. I’m better at raising questions than answering them.
Second, I am not a lawyer (or an accountant). I want to give a general overview of the many business decisions you need to make, but you need to talk to a professional lawyer and a professional accountant before you decide on any course of action.
There are many business entities that you can create for your consulting venture, but the simplest, by far, is a sole proprietorship.
In a sole proprietorship, you are doing business under your name. You do not need to file any paperwork and taxes are relatively simple. It cannot be a partnership (sole=one and only one). You are personally liable for any debts and cannot protect your personal assets if you get sued.
In a partnership, two or more people share ownership of a business. In a partnership, partners are jointly and individually liable. You must define issues associated with dividing profits and the different responsibilities of each partner. You also need rules on how to add new partners and how to dissolve the partnership.
Most independent consulting situations do not fit in well with a partnership model. It often makes more sense to contract out work from one “partner” to the other on a client by client basis.
A limited liability company (LLC) produces an independent legal entity that conducts business under its own name. It provides protection against creditors and litigants (hence the “limited” in the name). It requires some legal paperwork and possibly some legal fees.
An S corporation/C corporation also produces an independent legal entity that conducts business under its own name. It has some protection against creditors and litigants. It has more stringent legal requirements than an LLC. Like an LLC, it requires paperwork and legal fees. It has special rules for taxation that can sometime save you money. Tax rules are the biggest differentiation between an LLC and an S/C corporation and also the biggest differentiation between an S corporation and a C corporation.
Here are some questions to ask before deciding on sole proprietorship or LLC or S/C corporation. Are you taking out a loan to start your independent consulting business? Large loans may make you seek out the financial protections of an LLC or S/C corporation
How likely are you to be sued by your customers? High litigation risk may make you seek out the protections of an LLC or S/C corporation.
How sensitive are you to tax issues? An S/C corporation offers ways to route income through different routes with different tax implications. The S/C corporation might also offer tax advantages to the payment of health benefits to yourself.
How complicated do you want your legal/accounting life to be? The sole proprietorship has the fewest complications and the S/C corporation has the most complications.
You can start as a sole proprietorship and convert to an LLC or S/C corporation later. You can also convert an LLC to an S/C corporation.
It’s important to note that the rules on each of these business models vary from state to state! Talk to a lawyer, talk to a lawyer, talk to a lawyer!
Some people consult for free (e.g. Statistics Without Borders), but if you want money for your work, you need to think about billing. The physical process of invoicing will be covered later. Here we need to talk about how much to charge for a project.
There are two important choices here that you need to face right away and there is no easy way to choose. Do I bill by the hour? or Do I bill by the project?
A third alternative that we won’t discuss today, but is worth considering, if you can get it, is to offer a flat rate to a regular customer that offers them a set number of hours of work per month and lets them have first dibs on your time.
If you bill by the hour, the average consultant asks for $130 per hour. See the salary survey in the Spring 2006 issue of the newsletter for the Statistical Consulting Section of the ASA. Don’t sell yourself short! If you ask for too little, you are hurting yourself and you are hurting the Statistics profession.
Factor in variations in workload when setting a consulting rate. You’re not likely to get 40 hours of consulting each week for every week in the year. Also remember that marketing, bookkeeping, and professional development are all on your own dime.
You may change your rates depending on the type of client and the type of work. I charge more for consulting that involves proprietary research (I don’t own anything after the project is done) and for consulting involving travel. I charge less for clients who are working on a Masters thesis or PhD dissertation.
You have the option of offering a volume discount to a client who gives you a lot of work (e.g., over 100 hours in a single year). There are less marketing expenses for these clients.
You can increase your rate at any time. Think about revising your hourly rate at the beginning of each new year.
Also, post your consulting rates on your website. That will screen out clients who think that they can pay you some ridiculously low rate.
Billing by the hour is easy if you can convince the client not to place an upper bound on the amount of hours worked. You should still offer a rough estimate of number of hours needed. Provide your clients with interim results, if possible, to assure them that they are not throwing their money into an endless pit.
If you bill by the hour and your client asks for an upper limit on the amount of hours worked, you need to either estimate the total amount of work needed up front, or divide the task into small pieces and reach an agreement on the amount of time for each piece before starting that piece.
You also need an agreement on what should be done if you exceed the number of specified hours: will you do any excess hours at no extra charge, or will you re-negotiate if you exceed the number of hours required?
Billing by the project requires a detailed plan of what you will and will not provide at the end. You also need to specify something about the quality of data that you will be receiving. Assume that the data that you get will require substantial cleaning prior to starting any data analysis.
If you have a hard time producing a detailed plan of what you will do, start out with an hourly rate for a small amount of time (perhaps five or ten hours of work) that will allow you to understand and document out the scope of the work that you will perform.
If you bill by the project, do not wait until the end of the project to ask for money. You can ask for a retainer, a partial payment of the total project cost (usually one fourth or one half) before the work begins. You can ask for part of the money on a regular basis (monthly) or as your client gets certain intermediate parts of your work.
Billing by the project usually requires a lot more up front work, but it offers two big advantages. First, it will encourage your client to think in terms of how valuable this data analysis will be to them and their companies. This will often make it easier for you to negotiate larger fees. Second, if you find yourself to be more efficient than expected and finish the project in one quarter of the time you projected, you will still keep the full amount that you originally negotiated.
Billing by the project, however, is high risk. If you under-estimate the amount of work, you could end up working a bunch of extra hours for next to nothing.
There are different ethical concerns about the two billing methods. With billing by the hour, you need to be honest with what the client does and does not need and not add on extraneous analyses just to pad your billable hours. With billing by the project, you need to be sure that you run all the appropriate diagnostic plots and quality checks to insure that you will have a quality product. Avoid the temptation to cut corners.
If you bill by the project, beware of a client who wants to add “just a few small things.” If the scope of the project changes, your price has to change as well.
There are several “red flags” that should encourage you to think about increasing the number of hours that you estimate or the total price of your project if you bill by the project.
- “Dirty” data
- Longitudinal data
- Hierarchical data
- Unusual size (more the number of variables than the number of cases)
- A variety of different analysis methods that makes it difficult for you to automate your work.
There are a couple more general considerations for billing. Learn how to use PayPal to make it easier for small clients to pay you easily. Bill in regular and predictable intervals (e.g., monthly). Avoid having your hours pile up and then surprising your client with a large bill. Regular billing also helps you discover a deadbeat client earlier so you can cut your losses.
It was the movie executive, Samuel Goldwyn, who first said “A verbal contract isn’t worth the paper it is written on.”
Many consultants will not start work on a contract without first having a written contract in place. A written contract provides protection both to the consultant and to the client and can often help resolve disputes. If there is any forseeable possibility of litigation involving your work, a contract will help avoid many legal headaches.
Other consultants will do work without a contract or will only use a contract if the client demands it.
Work with a lawyer if you want to develop a standard contract for use with your clients. Some elements that this contract could cover include:
- How much and how often you will be paid.
- The scope of work of the project.
- How to handle disputes.
- Issues involving liability (protection against lawsuits involving third parties).
- Assurances about maintaining appropriate confidentiality for any data you receive.
A good contract should be symmetrical and not place all of the burden (e.g., penalties, liability risks) on one party.
You can dispense with a contract if you trust the other party to treat you fairly or if you are willing to handle an unresolvable dispute by forgoing your consulting fee.
Even if you don’t have a formal contract, you should send an email that outlines your understanding of what you will do and when and what you expect from your client.
If your client requires a contract, read the contract and have a lawyer review it (especially important for your very first consulting contract). Strike out any objectionable provisions and send it back.
Look out for provisions that
- place all the responsibility in your lap should a third party decide to sue your client.
- limit your ability to seek redress if there is a dispute between you and the client
- place unreasonable demands on you (e.g., carrying an excessive amount of insurance).
- that limit your ability to re-use your own code for other clients.
- that restrict your consulting fee to the lowest amount that you charge anyone else.
- that make your fee contingent on a certain statistical outcome.
Don’t sign anything you are uncomfortable with, even if your client assures you that the contract language is just a formality.
Here’s some good advice on contracts.
“I long ago learned the power of “just saying no” in contract negotiations. The vast majority of stuff I cross out, with only a cursory explanation of why (no need to write paragraphs) is accepted with no objection whatsoever. I’m not shy about crossing out lots of things, either. It’s often standard boilerplate whose purpose was long forgotten, or stuff some lazy lawyer put in either so they could use the same contract for everything or to avoid having to question the client as to what protections they really needed. If there’s an actual reason for it that applies to your situation, you’ll hear about it once you say “no,” and can go from there.” David Lyon, Email to the Statistics Consulting Section of the ASA, August 30, 2014.
You don’t have to set up an elaborate accounting system for your consulting business. Here are some of the minimal things that you will need.
A separate bank account is an absolute must. It costs you almost nothing. You might even get a free toaster! The separate account is very important if you want to document business expenses and deduct them from your business income for tax purposes. Deposit all income into your business account and pay for all business related expenses from this account. When you need money from your consulting business, write a single check from this account and deposit that in your personal checking account. Do not mix business and personal expenses as it makes it harder for you if your taxes should be audited.
Also an absolute must is an invoicing system. You need a way to get paid and most business will ask for an invoice before you get paid. You can find professional style invoices if you invest in accounting software.
You can also produce business-quality invoices with a standard word processing document or spreadsheet. A simple Internet search for “sample invoice template”
The invoice should include
- Your name and address,
- The name and address of your client,
- The date the invoice was printed,
- A unique invoice number,
- Who the check should be made out to (your name or your company’s name).
- Your price with itemization details (number of hours worked or details on the product that you delivered to the client).
- A due date on the invoice or a rate that would apply if the invoice is paid late, and
- Contact information if there are any questions.
Depending on the complexity of your work, you may wish to invest in accounting software. The accounting software will allow you to produce professional looking invoices, track business expenses across various categories, monitor your cash flow, and produce detailed reports on profits and losses that you can use at tax time.
Accounting software may be overkill for a simple consulting business. But it might save you money if you work with a professional accountant or tax preparer because you could directly dump electronic records from the accounting software into a tax return.
You should talk to an accountant about what business expenses you can deduct and how you need to document them for tax purposes. I am not an accountant, but some legitimate business expenses might include:
- Cost of computer hardware and software and internet access.
- Travel costs to the client’s worksite.
- Advertising or promotional expenses.
If you deduct business expenses, keep a paper trail of receipts, invoices, and cancelled checks in case you are audited.
You should become familiar with the IRS Schedule C, even if you get your taxes done by an accountant. Also ask your accountant or tax adviser if you need to pay estimated taxes on a quarterly basis.
There are two types of insurance, insurance for your personal needs and insurance for your business needs. Personal insurance requirements might include life insurance, health insurance, and disability insurance. Business insurance requirements might include liability insurance and errors and omissions insurance.
I get personal insurance coverage through my spouse, which makes life a lot easier for me. If can’t get coverage through your spouse’s job, you need to find a way to pay for some of the personal insurance needs that your company would have provided for you as a part of your work contract.
Before you quit your normal job, talk to human resources about options to continue your insurance coverage after you leave work. You can also purchase insurance through some professional organizations, such as the National Association of the Self Employed. You can always find a insurance agent and purchase your own insurance directly from them.
In addition to insurance needs, you should also plan for your own retirement program. You have some additional retirement savings options as an independent consultant.
Liability insurance protects you if someone sues you. You already have liability insurance that covers you when you drive. You should consider liability insurance that provides coverage when you consult. Issues that raise concern about the need for liability insurance are:
- Working with a wide range of clients,
- Working on projects with a forseeable possibility that a third party might try to sue your client and you both.
- Working on projects that involve life or death decisions, such as a Data Safety and Monitoring Board.
Errors and Omissions (E&O) insurance (also called Professional Liability Insurance) covers a slightly different problem from liability insurance. Most liability policies protect you against liability claims associated with property damage or bodily injury. There are other things you could be sued about that might not be covered by most liability insurance packages. Some examples:
- An error in your data analysis causes a delay in FDA approval of a new drug. The company sues you for lost income.
- Your automated real-time monitoring software causes a failure in the assembly line. The company sues you for re-tooling costs.
These types of problems are covered by E&O insurance.
There are several important business details that you need to address when you set up your consulting business. You need to choose between a sole proprietorship, partnership, limited liability corporation, or a chapter S/C corporation. You need a separate checking account and an invoicing system. Spell out the scope of work, confidentiality assurances, and liability issues in a business contract. Once you’ve made these moves, you’re ready for the fun stuff, meeting with new clients and helping them solve their problems.
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