10 legal issues that consultants
should know about
Don't get blindsided by some legal misstep you never even heard of. Calvin Sun runs
through the nitty-gritty issues all consultants should be prepared for.
By Calvin Sun | in 10 Things, October 8, 2010, 5:19 AM PST
As a consultant, you face more than technical challenges. You face legal ones as well. For this
reason, the more you know about these legal matters, the less chance you have of getting into trouble.
Although this article is not meant as legal advice, it can help you be aware of some issues that
concern you. At the very least, it will alert you to questions and issues you might need to raise with
your own attorney.
Note: This article is also available as a PDF download.
1: Status — consultant or
employee?
Make sure of your legal relationship to your client. Are you really an independent contractor, so you
should receive a form 1099 at the end of the year reflecting your billings? Or could you actually be
considered an employee, who should receive a form W-2?
The company using your services most likely prefers the former, and you might also. The Internal
Revenue Service in the past used a series of 20 questions to determine whether a person was a
contractor or an employee. However, the IRS recently streamlined those questions into a three
general categories:



Behavioral control (i.e., how much direction and control the business has over the individual, in
terms of working hours, sequence of actions, and tools and equipment to be used)
Financial control (i.e., how the individual is paid, e.g., weekly or hourly vs. a flat fee)
Type of relationship (i.e., how permanent it is and how the parties view the relationship)
Generally speaking, the greater the behavioral control, and the greater the financial control, and the
more permanent the relationship is, the greater the chance that the IRS will view you as an employee
rather than as an independent contractor.
2: Income and self employment taxes
The distinction between employee and independent contractor will affect the way you handle your
taxes. As an employee, your employer is responsible for withholding income taxes from your
paycheck. In addition, you and your employer each contributes half to Social Security payments.
If, however, you are an independent contractor, you are responsible for your own taxes because the
organization that pays you generally will not withhold anything. You're also responsible, depending
on how you're organized legally, for completing appropriate business tax returns, such as a Schedule
C , if you're a sole proprietor.
3: Sales tax on your fees?
Check with your state's department of revenue to see whether the fees you charge clients are subject
to tax. If they are, and you are not collecting and remitting such taxes, you could have a problem.
4: Intellectual property / "work made for hire"
In the course of your consulting work, you may create intellectual property for use by your clients.
Such work might be entitled to copyright protection. In this case, be clear with your client about such
copyright ownership. You do not want your work to be considered a "work made for hire." The
copyright for such a work would reside with your client, even though you were the one to create the
work.
The client has high hurdles to overcome to claim work made for hire status — but be safe and avoid
misunderstanding. In your statement of work or in your contract, consider including a clause that
expressly excludes your work product from being classified as a work made for hire.
5: Nonexclusive vs. exclusive license
If you are the copyright holder of intellectual property, you can permit others to use that property via
a license. In return, of course, you probably would charge the other party a fee, or royalty, for the
privilege of holding this license.
When you grant licensing rights, you can do so exclusively (to only one license holder) or
nonexclusively (to more than one license holder). You would do an exclusive license, in most cases,
because your client asked or demanded it. In such a situation, obviously, you would probably want to
charge a higher royalty for an exclusive license than a nonexclusive license.
6: Professional liability vs. general liability insurance
You should consider at least two types of insurance: professional liability and general liability
insurance. While both protect you from things you do or fail to do, the specific focus of each is
different. Professional liability insurance (also known as errors and omissions insurance) protects you
from the consequences of bad decisions and actions with respect to your consulting. For example, if
your improper systems implementation caused the client's business to shut down, resulting in loss of
revenue, your professional liability policy might protect you from a client lawsuit.
General liability insurance protects you from other liability. For example, such a policy might protect
you in the event that your client falls within your office or you accidentally spill hot coffee over an
audience member at one of your presentations.
7: "Claims made" vs. "occurrence" insurance coverage
Liability insurance usually differs from other insurance, such as automobile, in one important
respect: Policies of the former are generally based on "claims made," while those of the latter are
based on "occurrence."
Suppose you are involved in an incident on June 1, while you hold an insurance policy with company
A. On July 1, you change from insurance company A to insurance company B. Then, on August 1,
the other person files a claim regarding the incident. If both policies were "occurrence" policies,
company A would be responsible for this claim, even though it no longer carries your insurance.
However, if both policies were "claims made" policies, company B would be responsible, even
though the incident occurred prior to your becoming their policyholder.
8: Business organization option — the sole
proprietorship
The way you organize your business determines the amount of reporting you do as well as the
amount of legal protection you have. If you are in business by yourself, the simplest form of
organization is the sole proprietorship. In Pennsylvania, in fact, if you include your name as part of
your business name (e.g., you are John Smith and your business is John Smith Consulting), you don't
even need to register with the state. But if the sole proprietorship business name does not include
your name, you would need to file a "fictitious name registration." Such a filing is designed to protect
the public so that they know who is involved with a particular business.
While a sole proprietor provides for ease of tax reporting, it involves legal risk. If you are sued
because of your business, you have no legal way to shield your personal assets — they can be used to
satisfy a judgment against you. Consider this fact carefully if you choose a sole proprietorship.
9: Business organization option — the corporation
A corporation offers significantly more legal protection. If you are sued over acts of your
corporation, generally only the assets of that corporation can be used in a judgment. Your own
personal assets, if separate from the corporation, usually can't be used. However, a corporation
requires its own set of tax returns and typically requires formal meetings and documentation of those
meetings.
To form a corporation, you'll probably need to file articles of incorporation with your state and you'll
likely need officers, a board of directors, and bylaws. For further information, check with your state's
Department of State (not to be confused with the U.S. Department of State).
10: Business organization option — the limited liability
company (LLC)
A third form of organization, available in many states, is that of a limited liability company (LLC).
Think of an LLC as combining the best features of a sole proprietorship and a corporation. On the
one hand, the LLC does not file its own returns — you include income on your own Schedule C, just
as for a sole proprietorship. On the other hand, if you're sued, only the assets of the LLC are
generally at risk — not your own personal assets. For this reason, many consultants use an LLC form
of organization.
× Comments for this thread are now closed.
nwnick • 7 years ago
I've always wondered how having a Corporate entity between you and the customer would actually help
much. If the customer sued, wouldn't he sue both the corporation and the individual?
unhappyuser nwnick • 7 years ago
Anyone even remotely involved will get sued. The better chance that the plaintiff will get money!
EMD
PMPsicle unhappyuser • 7 years ago
It's both easier and more difficult to get past the corporate veil than most people presume.
Some people presume that the corporate veil can't be bypassed. However, for a director there is a
personal liability issue especially with regards to any money being held.
Other people presume that the corporate veil can be easily bypassed. However, generally speaking only
where personal liability arises can the veil be lifted by the courts. Basically, the judge needs to decide
that the corporation is a legal fiction. Not something they are willing to do frequently without a strong
precedent.
So in fact, unless the other lawyer figures he can bypass the veil naming you personally is a legal game.
(He wants the judge to judge both at the same time -- therefore reducing legal costs).
Of course, your law may vary so ask a lawyer before believing anything on the internet!
AnsuGisalas PMPsicle • 7 years ago
You'd be able to sue stockholders too... messy.
sliverson nwnick • 7 years ago
I'm not a lawyer, but I believe that it boils down to this: if the company officer performed his/her duties
faithfully and broke no laws, then generally the corporate shield will protect them in a lawsuit against
them personally. However, if the officer broke the law or didn't faithfully dischage his duties, then the
corporate veil can be punctured, and the officer can be personally liable.
TobiF • 7 years ago
I have a strong feeling that most of this article revolves solely around the situation in the U.S.
Nothing wrong with that. After all, it's a large and influential country in many areas. I just thought it's
worth mentioning.
Gis Bun TobiF • 7 years ago
Even then, since the US has laws that generally exceed just about every country, if the ten are followed,
I don't think you'd have an issue in any other country [unless they have something out of the ordinary].
Oh and since the majority of readers foir TechRepublic are Americans, it would make sense that it would
be US based.
If you wropte an article about this issue for those living un UAE, Slovakia, or Mozambique I don't think
many would read it.
NeilThyer • 7 years ago
As already mentioned by TobiF, items 1, 2 and 3 are specific to the US.
Items 8, 9 and 10 are just variations, not legal reasons.
9th should include - cross border contracts should include a arbitration option where a neutral or legally
recognized location for both countries.
10th should be the exit clause for the contract to enable termination and reduction of liability.
Gonzalo34 NeilThyer • 7 years ago
Looking forward for the '10 legal issues that cross border consultants should know about' article.
Gis Bun Gonzalo34 • 7 years ago
You need to follow the laws [and practices] used in the country that you are working in.
So if you are from Chile and take a consulting job in Argentina, you have to follow their laws. Anything
that isn't covered, you and whoever you work for would have to agree on the remaining issues.
NeilThyer Gonzalo34 • 7 years ago
11th - make sure you have the right visa. I have heard many times for people arriving in Asia and not
having the correct visa, only to be returned home. Organisations like APEC www.apec.org assist business
people with the visa programs.
12th Intl Taxation and repatriation of cash, countries like China are currency controlled, so repatriation
of cash is very difficult, and often requires additional legal council.
ian@write-research-office.com NeilThyer • 7 years ago
I don't think this would this affect people who conduct business electronically. Some people never leave
their office but are consulting and providing services globally.
Is the repatriation of money tied to the visa? IE. the reason you go to another country?
I have dealt with clients in nine different countries and never heard this phrase before.
lawandco • 7 years ago
Although he says he is a lawyer, he is misleading on item 4. Almost any contract work requires some sort
of task order from the client. When they pay you for the work you do on that task order - even if it is
verbal - everything you do is their property. Any time someone pays you it becomes their property and it
will be difficult for you, not them, to claim that it is not their intellectual property. Consultants almost
never win that argument.
bfpower • 7 years ago
Always good to see Calvin posting on TR. Thanks!
hineses@hotmail.com • 7 years ago
Another thing to consider is health insurance. As things currently exist in my state of North Carolina, all
health insurance providers are required to offer coverage to corporations but not to LLCs. Depending on
your situation, they may still offer you coverage but they are not required to. Even if they are required
to, it doesn't mean it's cost effective.
hineses@hotmail.com hineses@hotmail.com • 7 years ago
Another thing to consider is health insurance. As things currently exist in my state of North Carolina, all
health insurance providers are required to offer coverage to corporations but not to LLCs. Depending on
your situation, they may still offer you coverage but they are not required to. Even if they are required
to, it doesn't mean it's cost effective.
herlizness • 7 years ago
>
well, let's be clear about a few real world issues here:
(1) almost any sophisticated client / large company will absolutely insist on their absolute ownership of
the code. period. you don't have to accept this but you'll likely lose the gig if you argue the point; I can
tell you with certainty that I would not allow anyone in my organization to contract with an indy on
anything other than a "we own the code" basis
(2) don't overestimate the value of commonplace routines you develop; they may at times be clever and
useful but it's the very rare case where an organzation couldn't finda dozen other people to implement
the same solution a different way; to put it another way, in most cases ownership of copyright has little
or no value to the consulting programmer so there's no point in fussing over it; on the other hand, the
one thing you do want to be able to do is re-use patterns and idioms on your next gig. frankly, I've yet to
see a programmer not be able to do so.
(3) what employers need to be mindful of is that although they will typically "own the code" in many
cases they will have no copyright interest in it because the subject matter is not original; programmers
have been known to use code they found in an APress book in their work
(4) related to point 3, consultants need to be careful about incorporation of third party libraries in their
work; it is not ok to violate a lib owner's copyright in your work on a gig; you're subjecting your client to
liability and they will NOT be happy if they're sued for infringement
AnsuGisalas herlizness • 7 years ago
Being no expert, I can still see very clearly how those 4 points make solid sense.
pgit • 7 years ago
How about a contract line item by which the customer agrees to hold the contractor harmless for at
least certain potentialities?
AnsuGisalas pgit • 7 years ago
At the very least there's gonna be a massive wad of court ruling precedents. That's better than law, you
know.
It's law with the eventualities taken out.
It's worth checking out, it can tell you what you need or needn't worry about.
pgit AnsuGisalas • 7 years ago
`
mikifinaz1 • 7 years ago
I started consulting and none of this was really covered as widely as it is now. I searched out a lawyer
who specialized in this area of the law and every cent I paid, repaid me one hundred fold.
Back then the whole concept was viewed with suspicion and most employers wanted to get their hooks
in people so that they would have the whip hand in any situation.
pinnum • 7 years ago
As a technical writing consultant, I wonder about legal issues relating to documents. For example, when
I write a document, the client is supposed to review it. Doesn't that pass some or all of the ultimate
responsibility for its veracity to the client?
ian@write-research-office.com pinnum • 7 years ago
As a consultant, you are providing advice that may be outside the client?s expertise or knowledge.
That?s why they are consulting you.
Many clients do not understand technical, legal or financial speak and may be taking your word as being
correct while you, on the other hand, may be assuming they do understand. I cannot afford to assume
so I include a ?release from liability? clause into my contracts. I?ve never needed it but one day it may
save my a**
Falkows149 • 7 years ago
The key business issue behind ownership and is the ability of the contractor to perform similar work for
other clients.
I don't think it is realistic in most instances for an individual independent contractor to retain ownership
of the work. Nor do I think that it is realistic for an individual independent contractor to give anything
less than exclusive rights to the work to the client.
What is realistic and necessary is that the contractor retain the right to create similar works for others.
In a best case scenario, that would included the right to create and license derivative works to the work
peformed for the client.
chris@falkowskipllc.com
finlaw.in • 4 years ago
Hi Calvin,
It is really a helpful post and thank you for giving tips.
We are also providing Legal & Financial Consultancy.
Thank You,
Finlaw.in
williama.willis • 3 years ago
I always wondered how individuals got so many back-links to their websites and weblog content is such
a few months frame. Now we know. They use article submission software.
http://patch.com/california/alameda/enjoy-entertainment-through-most-powerful-medium-0
robertzucker • 3 years ago
This found to be really stupendous informative article.
Actually I was searching for researched based information on business consultants in Dubai and this
is really helpful. Thanks for sharing!
Joeywall87 • 2 years ago
Thanks for letting me know about the sales tax. I really wouldn't want to get any trouble about
something as simple as claiming the sales as taxable. I make sure I check up on this to see if it is. Thanks
for all the info. http://www.lo-re.com
robbhardy31 • 2 years ago
Calvin, I was studying up on the different types of business entities that exist for business owners. I can
see benefits to each of them as well as cons. It seems that the best way to narrow down which type of
business you should apply for would be to put all the facts in front of you and see which appears to be
most beneficial for the type of business you want to create.
http://www.fabianlaw.com
marcusfillion • 2 years ago
Consultants especially need to be aware of all the nit-picky details of their law. Business law is confusing
for anyone, but consultants are sued at a far higher rate than other companies. If you're going to go into
that industry, it's important to know how to protect yourself. http://www.burnettlawoffice.com
KevinKerinUniversal • 2 years ago
does anyone know if there are any tax implications or limitations on working for a client?
PetuniaEvans • a year ago
I had no idea that the relationship I have with my clients will effect the way the IRS views me! I'll be sure
to decide whether it's more of an employee, or independent contractor! I think I'd like to look further
into which insurance I like the best a bit more. But I'm glad I understand more about professional vs.
general liability insurance! http://www.hopeharder.ca/About-Us.aspx
10 things you should never do
on a consulting job
There are plenty of ways to shoot yourself in the foot when you're out on a job. Jack
Wallen lists a few of the worst offenses.
By Jack Wallen | in 10 Things, January 12, 2010, 2:20 AM PST
At one time or another, you may have left a consulting job wondering whether you did the right thing
or the wrong thing at a given turn. I don't mean issues involving PC setup or troubleshooting — but
things like your interactions with employees and the way you acted on the job site. How you handle
each moment will determine the outcome of the job and whether you are ever brought back.
Note: This article is also available as a PDF download.
If you want to establish a reputation of integrity and professionalism, you should never...
1: Ridicule another consultant's work
Nothing can make you look more unprofessional than mocking someone else' work. Oh sure, the
techs before you might have made some glaring mistakes... or did they? Maybe there was a reason
for what they did. You never know. So it's always best to play it safe and keep the running
commentary to yourself. It doesn't make you look better when you say things like, "Well, I never
would have done it this way!" or "That previous tech sure did a poor job configuring this machine."
That just makes you look petty and/or catty. Do your job the best you can and keep the remarks
"offline."
2: Make deals you aren't authorized to make
If you work for a consulting firm, you know there are channels for clients to take in ordering
hardware or services. Of course, if you have time and they need one more issue resolved, it's
probably safe to do that — so long as they're being billed the regular fee. But when it comes to
hardware, let those clients order through the proper channels. Don't go quoting prices and fees you're
not 100 percent sure of. If you think a client might request a quote, either have a menu of prices with
you or give them the right number to call.
3: Take shortcuts
The last thing you want to do is to take a shortcut that you aren't sure will last. Band-Aids are fine if
you know you are coming back to make a more permanent fix. But eventually, those shortcuts will
fail and will need further attention. And the time to failure is an unknown. It could be the minute you
drive away or months later. This is not the type of chance you want to take. It frustrates the client,
and it makes you look bad.
4: Book time spent socializing
Make sure you bill the client only for the time you actually work. This can be tricky if your clients
are friends or they employee your friends. When you go to a job like this, you know there will be a
period of time spent socializing, especially when you first arrive. Don't bill for this time. Start the
billing period when you start working, not when you're talking about last night's game, a date, your
+3 vorpal sword, or The Big Bang Theory (or all of the above).
5: Act like employees are in your way
You are there to serve those employees, who may or may not be able to do their jobs while you are
working. You are actually in their way. But they understand you have a job to do, and most often,
they respect it. It's when you start behaving as if those employees are in your way that things can get
a bit tense. Even if you are working in a small space, remember that you are the invader — not them.
6: Flirt
No matter how cute, pretty, sexy, or smart employees are, do not engage in flirtatious activity with
them while you are working. You are there to do a job and to do that job right. Nothing can get in the
way faster than when your mind has been body-slammed by your libido. Not only that, you never
know when the line between flirting and sexual harassment has blurred. You do NOT want a sexual
harassment suit brought against you and your company. If you feel a strong desire to connect with an
employee on the job, share your phone number and ask that person to call you.
7: Engage in political or religious discussions
There is really little more I can say to drive this point home. We all know that the last two topics you
ever want to discuss in the work place are politics and religion. No matter how strong your views,
don't poke this bear. If you do, you most likely will regret it.
8: Leave without explaining what you've done
Don't assume that you have monkeyed with desktops in such a way that the users won't notice. If the
"owners" of those desktops are there, you should let them know of any changes you made that may
affect them. No matter how small. You never know their competency level, so you can't be sure how
small a change is change enough to throw them off. This is especially true if you have to do
something on the periphery of the assigned job.
9: Fail to document
Documentation is almost always one of the last thoughts on a consultant's mind. It should, however,
be one of the first thoughts. Documentation will always make your job easier. When you return to a
site, you don't want to have to try to figure out what you did the last time you were there. Document
it, map it, draw it — whatever you have to do so that if you come back, you can pick up as if you just
left.
10: Refuse to listen to employees' needs
It is inevitable that while you are working, employees will talk to you. Many times, they will be
fascinated with what you are doing. And sometimes, they will assume that they know more than you
and want to help you. But in the cacophony of all that blather, one of those employees might mention
something you need to hear. Someone might know of a smaller issue that is a fundamental cause of
the bigger problem. Or someone just might have another problem that can be resolved (and billed).
Keep your ears open and don't make the employees feel like what they have to say is unimportant
(even if it is).
Getting it right
Consulting can be a tricky business. You have to be professional at all times and you have to treat all
your clients as if they are the most important client you have. Follow this simple advice, and those
clients will bring you back and refer you to others. Blow off this advice, and your competition will
thank you.
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