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Consultants:
How To Limit Your Exposure
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Business New Haven
1/12/1998
By: Judy Gedge
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If you're thinking about starting your own consulting practice, or are already in the business, it's important to structure your practice to protect yourself. Otherwise you could end up losing all of your assets. But with a little bit of up-front planning, you can enjoy all the benefits of being your own boss without exposing the house and kid's education fund to the vicissitudes of business.
You may be providing the exact same services as a consultant that you did as an employee, with one major difference - as a consultant, you are an independent contractor. Thus you personally can be held liable by your client if there's a problem with the work you perform. Only this time, it's not the rating on your performance appraisal that's at stake - it's the whole farm.
Let's assume you're a computer consultant and you've been hired by your former company to develop and install a new software system. You complete the job but, unfortunately, there's a bug in the system. Not only is it failing to perform, but it's interfering with other software programs resulting in a shutdown of the computer system. You go back in and are able to fix the glitch, but the total “down-time” is three days.
The next thing you know, you receive a demand letter from the company's attorney seeking tens of thousands of dollars in damages, claiming that you've provided faulty consulting services. “Wait a minute,” you tell yourself. “The last time a glitch caused a shutdown, everyone agreed that it was a software problem and thanked me for the extra time I put in. Can they do this?” The answer, unfortunately, is a resounding yes.
What will all of this mean to you? If you have not incorporated your consulting business, you can be held personally responsible for any and all obligations arising out of your business. That means that all of your personal assets can be seized to satisfy any judgments against you. But if you had incorporated or formed another “limited liability” entity, then the entity would be liable - not you personally. The assets of the entity could be seized to satisfy a judgment against you, but your house, savings and the kid's college fund would be secure.
If you're providing consulting services, take a careful look at the potential
for liability arising out if the type of consulting you perform. Giving opinions on environmental hazards may be particularly risky, while selecting colors for the physical plant of a corporate office may involve a minimal chance of
being sued.
Moreover, don't be lulled into a false sense of security because you're doing business from home. A million-dollar judgment can be rendered against a consultant whether she operates out of a downtown office building or
her attic.
Besides forming an entity of limited liability, it is also important that you maintain appropriate liability insurance. For consultants and other professionals, this is often called “errors & omissions” or “professional liability” coverage. This will cover you for a negligent rendering of services and will pay the cost of your defense. Finally, even though it may seem unnecessary in such an “informal” occupation, don't rely on verbal agreements with regard to your work and any other representations you and/or the client have made about the job. As with any other contract, misunderstandings seem to mount once something has gone awry. Approaching the courthouse door with just your bare face hanging out is an extremely uncomfortable position indeed.
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