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Liabilities and Expenses for a Consultant in partnership with Non-IT firm

Posted on 2011-03-21
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Last Modified: 2012-05-11
Hello, I am an independent computer consultant (operating under DBA/sole-prop), and am interested in partnering with a Sales firm to install and support proprietary computer systems after they are sold to offices. Once the sale is made, the firm passes my contact information to the client, and if my services are needed, I come in to install the system, purchase hardware if necessary. and for extra fee can support it as well.

I would like to know what legal liabilities I should be aware of (i.e. if system is compromised at some point? data loss?) and what the best business terms this partnership agreement should consist of (60/40% split, reimbursement for travel, etc) since it seems that I am taking on some risk.

Perhaps a DBA is not the best establishment since being a consultant, I can be liable for system compromises, data loss, etc. after system implementation.

I am probably way out of my league asking in this forum but any free legal advice or suggestions for affordable services would be appreciated.

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Question by:XAnalyzer
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by:MidnightOne
MidnightOne earned 20 total points
ID: 35182176
First off: Get incorporated as an S-corp. If you get sued as a sole-prop, all of your personal assets are on the table.

Second: Get liability insurance. I carried a half-million dollar omissions and liability policy when I was doing Y2K gigs - it was inexpensive even for a start up.

As far as sales, you're going to need to do some research. Call sales and marketing firms outside of the area where you'll be doing your work and ask them for a little of their time, even if you have to pay for it. I've no idea what the sales end percentages are, but I'd hate to see you get hooked for a high split if a 10% of the gross is considered standard.

The sales guy I worked with was easy - I told him my rate and he went to town. I really didn't care what he charged so long as he was able to generate hours I could bill.
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Author Comment

by:XAnalyzer
ID: 35183033
Hi MidnightOne, thank you for your reply. Interesting that you mention s-corp and liability insurance, i will look into that. Hoping for more replies from others' experiences.

The only remaining question is what type of partnership agreement is most fair for a sales/IT agreement...
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DrDamnit earned 30 total points
ID: 35184171
MidnightOne is dead on accurate:

1. Incorporate. The liklihood that you will get sued increases proportionally with your success and wealth. The better you are at your business, the more likely some lawyer will do a search on you to see if you have "anything for the taking". In the US, you can sue for any reason. If you give poor cusotmer service, or someone else touches a system that you originally set up, or if you even ever set foot in a business, you can be named as the defendant. Incorporate.

Further advice on incorporation: you should have a C corporation that holds and owns any property, equipment, etc.... The "C" corp will never make a profit because you need to have an attorney draft the corporation in such a manner that it pays for all your health insurance, gives you a car, and is owned by an S-Corp. The S-Corp will be subcontracted by the "C" corp.

This seems more complicated, but with this structure, you can just about forget the expense of having E&O insurance. Here's why: the "C" corp signs the contract. The "C" corp is the one that gets sued, but the only thing the "C" corp owns is a depreciating laptop. It pays all the income to an "S" corp, which then pays you. So, when the "C" corp gets sued, it just files bankruptcy leaving you and your S-Corp free to run and start another business and just keep on truckin'. No lawyers. You can pretty much answer the lawsuit yourself with a big middle finger.

You will, however, need to have a good corporate attorney who specializes in asset protection to set this up. It may cost you a couple hundred bucks on top of filing fees, but that is still cheaper than one year of E&O.

2. Liability Insurance (E&O) is not required under the setup that I have laid out above, but I would still have it just in case. You just won't need as much. You just need them to be able to file the paperwork so you remain lawsuit proof.

3. Have iron-clad, well balanced, junk-yard-dog attorney created contracts. Get them signed. Do it in a matter of fact manner, and do it before you do any work. Within the contract, have a liability limitation clause that states your maximum liability can not exceed the total amount the customer paid. This, in effect, says that: "If you so me, the best you're going to do is get your money back". This is a general deterrent because my money back minus lawyer fees makes it just not worth it.

4. Use a CRM and ticketing system to document EVERYTHING you do for EVERY customer. One of the things that no one seems to realize is that the credit card laws allow you to dispute a charge for just about anything an unlimited amount of times. Amex, Visa, Mastercard, etc... MUST ACCEPT a dispute, and then it is up to you to prove that you earned the money. We had a client do this one time because they were having money issues, so they disputed every vendor's charge for 3 months. We won because I ran a report in MS Dynamics that showed every ticket, email, phone call, and request that came in was processed and acted upon. I also submitted every phone call (in my state, we can record phone calls at will). So, 4 inches of paper and a CD of MP3's of the relevant phone calls gave such an overwhelming response to Amex that they closed the dispute right there. This same type of documentation will make you look great if you ever end up in court.

5. Your partnership contract should not really be a partnership contract. Partnership implies ownership in the firm.  In essence your sales firm will be selling your services, and you fulfill them. You pay them based on a commission and pay-for-performance standard and nothing else. Don't be generous on paper. Be a hard-ass on paper. Then, send them bonuses that are not included in the contract. Take them to play golf when you're very happy with them, and be the best client they have ever had. But contracts are there to protect your rights, not setup buddy-buddy partnerships.

The biggest issue in any contract is: "how do I get out of this". You need to be able to cancel the contract and pick up another firm if they are not producing. Likewise, if they do not represent you well, you need to be able to get out of it.

6. What should you earn?

This is really more of a market question than anything else. The standard rate in my area is $125-$150 / hour. I routinely charge $400 / hour for my services, which are very specialized. Figure out what is being charged in your area, subtract 1/3 for taxes for the take home, and see if you can live on that. Now, take the original amount, and divide by .7, and you have built in the 30% commissions for your sales people.

So, for example, let's say you want to "take home" after taxes: $100 / hour.

You must bill out: $100 / .7 = $142.00 per hour.

In order to pay the comissions, you have to do that math again:

$142 / .7 = $202 per hour.

So, a 5 hour package becomes $1,010.

The comissioned sales guy gets $303 right off the bat (and we don't care about his taxes. That's his problem).

Your taxes take: $212.10, and you are left with: $494.90 for 5 hours (a little less than $100 / hour).

Note: if you have a C-Corp doing the work, that is owned by an S-Corp. you actually get all $707 to start with. You can use this pre-tax money to pay for insurance, cars, equipment, etc... Whatever is left over gets paid to teh S-Corp, which you then pay yourself with.

7. Make sure you get paid.

I typically have client purchase blocks of time in a pre-paid fashion. I know I am going to do the work. I need to know they get paid. I am not a bank, and therefore do not extend credit. FYI: Invoicing a customer is extending credit. You are like a lollipop store: if they want the lollipop, they buy then eat. It's just that simple.

DISCLAIMER:
PS. I am not a lawyer. I am not even qualified to play one on TV. Seek professional legal advice before implementing any suggestion above.
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Author Comment

by:XAnalyzer
ID: 35185795
Holy smokes, DrDamnit, this was an excellent and well detailed action plan. Exactly what I was looking for. Will leave question open one more day to see if anyone else can lend an opinion. Thanks both of you for your advice.
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Expert Comment

by:DrDamnit
ID: 35186113
You're welcome. You may also want to check out the articles I have written on the site...

http://www.experts-exchange.com/ARTH_1354474.html

The ones in consulting will likely be most helpful to you at the moment.
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Author Closing Comment

by:XAnalyzer
ID: 35201826
I should have raised the point value for this question.
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