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Legal and Financial Risks of Running a Consulting Business

3 Mins read
  • There are various financial and legal risks you have to be aware of when running a consulting business in California.

Being the lead operator of a consulting business in California is a rewarding avenue. But it does come with a bucketload of financial and legal risks. Understanding these risks can essentially nullify them and ensure the long-term operation of your business. 

Here are some key financial and legal perils associated with a typical consultation business operation in Australia. You will want to also be aware of the most important business management practices that you should follow.

Legal risks

Here are the legal risks that one needs to keep in mind – 

Contractual disputes:

  • The risk: When running a consulting business, issues may arise with deliverables, workload, and payments if the contracts are poorly drafted and there are client misunderstandings. 
  • Solution: Always draft your contracts clearly and precisely, outlining workload, payment agreements, timelines, and contention resolution mechanisms. You can also consult with legal consultants to review the contracts. 

Liability for a piece of wrong advice:

  • The risk: If you provide advice to a client and it proves to be wrong and leads to damages, then you will be sued for negligence, omissions, and errors. 
  • Solution: Never give advice if it is outside your area of expertise, and always document everything you say. You should also obtain liability lawsuit insurance to protect your assets when such situations arise.

Intellectual property conflicts

  • The risk: When running a consulting firm, IP rights disputes may arise if the contracts regarding the product, such as software, reports, or strategies, have unclear ownership terms. 
  • Solution: Make sure that the IP ownership terms are clearly defined in your contracts. Also, specify whether the client owns the product rights or you retain them. 

Breach of Confidentiality or NDAs. 

  • The risk: Leaking the client’s confidential information, even by mistake, can be considered a breach of contract and result in a lawsuit. 
  • Solution: Issue NDAs wherever necessary and share them with your employees so that they understand the value of preserving confidentiality. 

Failure to comply with regulation

  • The risk: Your consulting firm’s failure to comply with governmental industry-specific regulations can cause them to impose fines and legal actions on you.
  • Solution: Make sure to update yourself on the current regulatory proceedings and ensure your business complies with them. 

Financial Risks

Here are some of the financial risks that one should remember – 

Issues with positive cash flow

  • The risks: While running a consulting firm, you cannot risk delayed payments, irregular income, and high spending, as it can make it challenging to cover the operating costs, thus leading to a cash flow issue.
  • Solution: Separate reserves for cash storage and ensure the invoices are sorted out without errors and miscalculations. Follow up on overdue payments and offer discounts if paid early.

Over Reliance on small amount of clients

  • The risk: Running a consulting firm requires relying on a few clients, which can be perilous as your company may go under if they reduce their costs or stop using your services completely. 
  • Solution: Diversify the customers you acquire and try never to depend on a single client for a long time.

Under-pricing your services

  • The risk: Setting prices much lower than necessary can stress your profit margins, and you may even go under.
  • Solution: Research your market correctly to set prices that attract beginner customers while benefiting your profit margins. Also, consider all the costs, including insurance, taxes, and overheads. 

Encountering unexpected expenses

  • The risk: Unforeseen expenses, such as technical breakdowns, marketing price increases, and sudden legal fees, can stress profit margins. 
  • Solution: Always keep emergency funds available for sudden expenses and plan out your budget thoroughly. Hire an adept accountant for your price range and change when your company’s time value increases. 

Tax compliance issues

  • The risk: Failing to file your taxes on time or filing incorrect returns can result in fines, audits, and interest costs.
  • Solution: Hire a qualified accountant for your price range who will help you do taxes and ensure your company complies with tax laws to the best possible degree. 

Conclusion

To minimize financial and legal issues, consult with financial, insurance, and legal professionals to ensure your company is never in the red. Try maintaining compliance with the law, implementing robust contracts, and prudently managing your invoices and bills. Counteracting these risks can only build a successful and sustainable consulting cover in California. 

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About author
Shirley Lowe is a professional real estate marketer and blockchain enthusiast from Burbank, CA. She is a tech geek, and an aspiring blogger who writes content for Landlord’s Tips, and has been featured as an author at Rank Watch and Real Trends.
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