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7 Legal Issues Every Consultant Should Consider

MMcCarthy
Expert Mod 10K+
P: 14,534
If you are thinking about setting up as an Independent Contractor there are a number of factors you should consider about how that would change the way in which you work.

While thinking about this list, I realised a number of the issues will vary greatly from country to country. So I tried to make this advice as general as possible. You should investigate further the legal differences for your country.

1. Contractual Relationship
Being an Independent Contractor, means you are entering into contractual relationships with your clients. Essentially, you are agreeing to provide services as per a written/understood contract for an agreed upon fee. I would always advise a written contract as it avoids misunderstandings and communication difficulties regarding the services that you are being contracted to provide.

It is important that you fully investigate any, and all, legal obligations imposed on you by entering into this type of contract. Be careful, as in some country's entering into long term contracts may lead to your legal status being considered that of an employee rather than an Independent contractor.

2. Tax on Earnings
Changing your status from that of an employee has implications to your tax status. As an employee, your employer normally calculates, withholds from your paycheque and pays your due taxes. However, you are now personally responsible for doing this. You will need to calculate your own taxes based on your country's tax system and organise paying same to the revenue department. In most country's, you will still be able to make those payments monthly and I would advise doing so as nobody wants a huge tax bill at the end of the financial year.

In some cases, expenses incurred in the course of doing business will be allowed against tax. This can significantly reduce your tax bill so you should investigate thoroughly which expenses your country allows against tax. These will also vary greatly depending on the type of business you set up (see 8).

3. Sales Tax / Value Added Tax
Most country's have some form of sales or value added tax. You will need to check whether the fees you charge are subject to this kind of tax. This will vary greatly from country to country. It is important though, as if your fees are subject to this kind of tax and you fail to charge it to your clients you may well find yourself personally responsible for it.

It is also worth mentioning that often government departments and charities have an exempt status when it comes to this kind of tax.

4. Intellectual Property / Copyright
As a developer in particular, your work may entitle you to claim property rights. Laws differ greatly on this but there are certain factors everyone should consider. Intellectual Property rights or copyright is not a given regardless of your country's laws. Firstly, it is almost impossible to claim rights on anything that is published on the internet. Even if you can establish rights in your own country, it is difficult to establish them internationally.

Secondly, you need to ensure your client does not assume ownership of your work as in they feel it is “bought and paid for”. If you intend to claim the rights to your work then you should make this clear in your contract with the client. Make sure it is clearly stated that you intend to retain ownership. You should also make clear the licensing of any such work and make sure that it complies with your country's laws. There is, for instance many differences between licensing laws in the US and Europe.

5. Professional Insurance
In some cases, you may need to take out professional insurance. This would be to protect you in the event that your work for the client in some way negatively impacted the client or for some reason you fail to meet your contractual obligations to the client.

6. Setting up your Business
There are a number of different ways to set yourself up as a consultant and again these vary greatly from country to country. However, most country's have some variation on these two basic models.
  • Self Employed / Sole Trader – This model essentially is a self assessment one. The main drawback with this is there is no limitation on your legal liability if, for instance, you are sued.
  • Limited Liability Company – There are legal obligations attached to this model such as filing annual returns to the government declaring earning, etc. However, as a director your legal liability would be confined to company assets.
7. Business Name
Perhaps you are self employed but don’t wish to trade under your own name or for some reason you don’t wish to use your company name. In this case the name you trade under is known as a business name. You must make sure that that name is registered (usually with the company’s office). This allows you to use the name in all aspects of your business. All correspondence, materials exchanged should have your business name to clearly state this is a business matter.
Oct 19 '10 #1
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3 Comments


Expert Mod 100+
P: 2,322
Excellent points Mary.

To help with the taxes and entity issues, a good idea would be to consultant an accountant before hand. They will guide you to what type of entity you should setup and how to order your finances to deal with taxes.

Also consult a lawyer through the process and keep them in the loop as you sign major contracts etc. Especially when it comes to things you don't understand. A little expense now can save you a lot of hassle later.
Oct 19 '10 #2

Expert Mod 100+
P: 2,322
Another tip: if legal expenses are something to worry about, especially in the beginning. There are some good services like http://legalzoom.com that allow you to purchase template legal documents and contracts.
Oct 19 '10 #3

NeoPa
Expert Mod 15k+
P: 31,121
Nice points Mary.

I'm just heading in that direction myself as it happens. I'll remember to use this as a check-list. Thanks :-)
Oct 19 '10 #4