Expert Advice
A Risk Management Guide for Marketing and Management Consultants

Chapter 1: Understanding Your Independent Consulting Business's Risks
Part 2: How to Identify Your Marketing or Management Consultancy Risks

Now that you understand what business risk is in general, let's talk about the specific risks that affect marking and management consulting businesses. A solid risk management plan considers all of your business's risks — general and specific. And good risk management begins by objectively taking inventory of these risk exposures.

A "risk management plan" is all the actions your business takes in order to limit the threats to your business. Once you've pinpointed your business's risks, you can take measures to mitigate vulnerabilities. To help you get started, consider the following factors that could financially impact your consulting business.

Client Contracts

As a consultant, you need a tangible way for clients to measure your services. Client contracts outline project goals so you can demonstrate whether you've held up your end of the bargain. Plus, offering concrete milestones helps manage client expectations, which may reduce the likelihood of a lawsuit over a miscommunication.

If a client does sue your consultancy, your contract acts as proof of your agreement and the terms of your services. Another benefit of client contracts is that they preserve your status as a self-employed individual. Should the IRS question your employment arrangements, you will have a paper trail of client contracts.

In an audit, these provide proof that you work as an independent contractor, not as an employee. If the IRS wrongly categorizes you as an employee, rectifying the mix-up could cost you time, money, and effort. It could land your clients in hot water, too.

For more information about what to include in your client contracts, jump to "Chapter 4, Part 3: What Should Independent Consultants Include in Their Client Contracts?" in this guide.

Compliance

Even if you operate your marketing or management consultancy out of your home, you need to carry the appropriate business licenses or permits. Often, you can accept client fees after completing a brief business license application with your county clerk's office.

If your state collects sales tax on consulting fees, you may need to register your business with the state department. If you don't register your business, you may inadvertently violate federal guidelines that differentiate employees and independent contractors. This can result in your clients being wrongly accused of evading labor laws.

Finally, if your consulting company operates under any name other than your personal name, your county or state may require that you register your Doing Business As (DBA) name New browser window icon.. This is the legal name of your business and is required on all government forms and applications.

For more information about business licensure, check out the U.S. Small Business Administration's helpful article "Find Business Licenses & Permits New browser window icon.."

Professional Liability

Consulting is often a target for professional liability claims because the financial benefit of your recommendations can be difficult to measure, especially for short-term contracts. And if your clients suffer a financial loss as a result of your advice, you could be sued.

For example, imagine you're a human resources consultant, and you miss a deadline for creating new recruiting and hiring practices. Your client could sue you for breaching the terms of your contract. Because claims like these are all too common, you should guard your businesses with adequate Errors & Omissions Insurance.

This coverage can account for your legal defense fees, court-ordered compensation, and other associated costs. For more information about Errors & Omissions Insurance, jump to page XX of this guide.

Consultants are vulnerable to professional liability claims because financial benefits can be difficult to measure.

Personal Liability

If you're a sole proprietor or independent consultant, there is no legal distinction between you and your business. While this means you're personally entitled to all the profits your business generates, it also leaves you responsible for your business debts.

For example, let's say a client sues your business because your marketing plan didn't generate the expected numbers. If you don't have the commercial funds or insurance to cover the damages the judge awards the client, your personal assets can be collected to settle the claim.

One way to differentiate your personal and commercial entities in the eyes of the law is to register your business as a limited liability corporation New browser window icon. (LLC). If you wish to remain a sole proprietor, though, you should carry adequate small business insurance to cover your potential losses.

Business Liability

Unfortunately, your business can be sued for more than disappointing your clients. Whether you operate from commercial office space or your home office, clients could be injured on your premises.

For example, say a client trips over your welcome mat and breaks a wrist. You could be sued for the cost of their medical expenses. Without General Liability Insurance, your business would be responsible for handling the cost of the claim.

It's worth noting that your Homeowner's Insurance probably does not cover business liabilities. And even though your Homeowner's Insurance covers your house, it doesn't protect your commercial assets. So if a fire destroys your computer equipment, those replacement expenses fall squarely on your shoulders when you don't have Commercial Property Insurance.

As you can see, even seasoned business owners are susceptible to setbacks and potential liabilities. Check out "We the Plaintiffs New browser window icon.," an infographic by AboveTheLaw.com New browser window icon., for an illustration of how much today's reliance on the legal system hurts small-business owners.

In the next chapter we explore the small business insurance policies that protect independent marketing and management consultants.

Next: Chapter 2: Understanding Small Business Insurance for Independent Consultants

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