{"id":4870,"date":"2021-08-16T13:29:02","date_gmt":"2021-08-16T18:29:02","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/should-an-independent-contractor-form-an-llc.html"},"modified":"2025-10-14T23:17:00","modified_gmt":"2025-10-15T04:17:00","slug":"should-an-independent-contractor-form-an-llc","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/should-an-independent-contractor-form-an-llc.html","title":{"rendered":"Independent Contractors: Should You Form an LLC?"},"content":{"rendered":"\n
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Independent Contractors: Should You Form an LLC?<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Key Takeaways<\/h2>\n

An LLC combines the liability protection<\/span> of a corporation with the pass-through<\/span> taxation and operational simplicity of a sole proprietorship<\/span>, making it a popular choice for independent contractors<\/span> and small <\/span>business<\/span> owners<\/span>.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n\n\n

Do you have an online business? Or are you a freelance<\/span> writer or consultant? Maybe you clean houses or sell real estate? If so, you might be an independent contractor<\/span>. In the newly developing\u00a0gig economy<\/a>, many people work as independent contractors<\/span>. They want to control their hours and be their own boss.<\/p>\n

As an independent contractor<\/span>, your default business structure<\/span> is called a sole proprietorship<\/span>. A sole proprietor<\/span> is someone who individually owns and operates an unincorporated business. The primary benefit of a sole proprietorship<\/span> is that it is simple to run your business. You report all income on your business on your personal income tax<\/span> return and you don\u2019t have the corporate filings or paperwork of a formal corporate entity.<\/p>\n

However, the main drawback is that you are personally liable for any claims against your business operation. If you are self-employed, you want to protect your personal assets<\/span> from your business activities. In that case, you may consider instead forming a limited liability company<\/span><\/a> (LLC) for your business.<\/p>\n

The following article provides a brief overview of forming an LLC<\/a> as an independent contractor<\/span>.<\/p>\n

Form your LLC with confidence.\u202fOur trusted partner LegalZoom has packages starting at $0 + filing fees.<\/a><\/i><\/b><\/p>\n

What Is an LLC?<\/h2>\n

A limited liability company<\/span> (LLC) is a legal entity<\/span> that combines the benefits of a corporation and a partnership. An LLC<\/a> is a business entity<\/span> used to separate your business operations from you as an individual. So unlike a sole proprietorship<\/span>, if there is a lawsuit, only the LLC\u2019s assets are in jeopardy. Any claims do not attach against you personally.<\/p>\n

If you\u2019re an independent contractor<\/span> with your own business<\/span>, a single-member LLC<\/span> (SMLLC) may be right for you. One person owns this type of business<\/span>. You still report your business income<\/span> on\u00a0Schedule C<\/span><\/a>, but\u00a0as an LLC owner<\/span>,\u00a0you also get personal <\/span>liability<\/span> protection<\/span>. This means if your business has debts or legal issues<\/span>, your personal assets<\/span> are usually safe. For LLC taxes<\/span>, you\u2019re considered a \u201cdisregarded entity,” which simplifies filing taxes<\/span>. Most independent contractors<\/span> form SMLLCs.<\/p>\n

Professional LLCs are for licensed professionals like doctors, lawyers, or dentists. In California and other states, certain entrepreneurs<\/span> must form this special type of LLC. It\u2019s like a regular LLC but designed for professional services. Members of a professional LLC get the same liability protection<\/span> and tax advantages<\/span> as other LLCs. If you provide a professional service, check if your state requires a professional LLC.<\/p>\n

Advantages of an LLC<\/h2>\n

There are several advantages of forming an LLC that independent contractors<\/span> should consider.<\/p>\n

Limited Liability Protection<\/span><\/h3>\n

The main reason independent contractors<\/span> form an LLC is to protect their assets. An LLC separates your business liabilities from personal assets<\/span>. If someone were to sue your business for negligence, they could only go after the assets in your company and\u00a0not you personally. Liability protection<\/span> is critical if you own a home, have a significant net worth, or have other assets. LLC owners<\/span> enjoy this shield against personal lawsuits, which is great for small <\/span>business<\/span> owners<\/span>.<\/p>\n

Pass-Through<\/span> Taxation<\/h3>\n

An LLC also helps with business taxes. This is because LLCs usually don\u2019t pay taxes themselves. Instead, business income<\/span>\u00a0passes through\u00a0to your personal tax return<\/span>. You report profits and losses on your personal tax forms<\/span>. This pass-through<\/span> taxation can be a big tax advantage<\/span>, especially for small businesses<\/span>.\u00a0<\/p>\n

Pass-through<\/span> taxation avoids double taxation<\/span>. Double taxation<\/span> means the business owner<\/span> pays taxes on profits and then pays taxes on the business owner<\/span>\u2019s dividends. Double taxation<\/span> is common with business entities<\/span> like C corporations<\/span> (C corps).<\/p>\n

Self-Employment Taxes<\/span><\/h3>\n

Independent contractors<\/span>, as sole proprietors<\/span>, usually have to pay self-employment taxes<\/span> (FICA<\/span>). As of\u00a02025, the\u00a0self-employment tax<\/span><\/a>\u00a0is 15.3%. The tax allows 12.4% for Social Security<\/span> (up to an annual wage base limit) and 2.9% for Medicare<\/span>, so independent contractors<\/span>\u00a0must withhold 15.3% of their earnings to pay when filing their personal tax returns<\/span>.\u00a0<\/p>\n

LLCs give independent contractors<\/span> flexibility. An LLC owner<\/span> can choose to be taxed as an S corporation<\/span> by filing IRS<\/span> Form 2553. As an S corporation<\/span>, the LLC owner<\/span> can pay themselves a reasonable salary subject to payroll taxes<\/span>, and take the rest as distributions that are not subject to self-employment tax<\/span>.<\/p>\n

Promote Professional Image<\/h3>\n

As a business owner<\/span>, your image is essential. Potential clients are more impressed with a name brand rather than an individual. For example, Eco-Friendly Cleaning LLC sounds like a more professional operation than just one person operating a cleaning service. Furthermore, filing your LLC business name<\/span> with the state registers that name so you do not have to file a “doing business as” (DBA) or fictitious name for your company.<\/p>\n

Organize Business Accounting<\/h3>\n

As an LLC, you open a business bank account<\/span> to receive income and pay business expenses or business debts<\/span>. The bank account<\/span> separates your business operations from personal finances<\/span>. Thus, your accounting is more organized at tax time. You\u2019ll track business expenses, income, and tax deductions<\/span> more efficiently.<\/p>\n

Appeal to Business Clients<\/h3>\n

Businesses that hire independent contractors<\/span> want to ensure the IRS<\/span> does not consider them employees. Otherwise, the companies are liable for benefits and tax withholding. One of the IRS<\/span>\u2019s\u00a0tests of an independent contractor<\/span><\/a>\u00a0is if you are in business for yourself. An LLC is a separate <\/span>business<\/span> entity<\/span>, so there is proof that you are in business for yourself.<\/p>\n

Disadvantages of an LLC<\/h2>\n

Compared with a sole proprietorship<\/span>, an LLC business structure<\/span> costs money to create and maintain. Therefore, if an independent contractor<\/span> is not making much money in their venture, the costs of the LLC outweigh any potential benefits of liability protection<\/span>.<\/p>\n

Additionally, if there is little inherent risk of a lawsuit, it may not justify forming an LLC. For example, freelancers<\/span> writing as a\u00a0side hustle\u00a0have low liability exposure. However, working as an electrician carries a more significant risk of a lawsuit.<\/p>\n

How To Form an LLC<\/h2>\n

Forming an LLC is easy to do. There are six steps to setting up an LLC:<\/p>\n

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  1. \n

    Choose the\u00a0business name<\/span> of your LLC<\/a>. Check with your state that the name is available.<\/p>\n<\/li>\n

  2. \n

    Designate a\u00a0registered agent<\/a>. You can serve as the registered agent or name someone else.<\/p>\n<\/li>\n

  3. \n

    Draft\u00a0articles of organization<\/span><\/a>. File them with the state and pay a filing fee.<\/p>\n<\/li>\n

  4. \n

    Draft an\u00a0LLC operating agreement<\/span><\/a>. This document is similar to corporate bylaws.<\/p>\n<\/li>\n

  5. \n

    Apply for EIN<\/a>\u00a0(Employer Identification Number<\/span>). The EIN is similar to a social security<\/span> number for the business.<\/p>\n<\/li>\n

  6. \n

    Apply for\u00a0business licenses or permits<\/a>\u00a0under the LLC name.<\/p>\n<\/li>\n<\/ol>\n

    An LLC is simple to maintain as well. You file an annual report<\/span> to the state and pay a fee. An LLC is a good choice for independent contractors<\/span> wanting liability protection<\/span> and to avoid double taxation<\/span>. Create an\u00a0LLC yourself in minutes<\/a>, or seek legal advice from a local business attorney to find the best structure for your business.<\/p>\n

    Getting Legal Help With Forming an LLC<\/h2>\n

    Forming an LLC can be complex, especially if you\u2019re new to it. It\u2019s wise to get legal help. A lawyer can guide you through the process, ensuring you meet all legal requirements. They can help with your articles of organization<\/span>, operating agreement<\/span>, and can advise on whether a C corp or an S corp is right for you. Legal help can also be invaluable for understanding tax deductions<\/span> and how to manage taxes as an LLC owner<\/span>.<\/p>\n

    Speak to a\u00a0local business attorney<\/a>\u00a0about forming an LLC today.<\/p>\n\n\n

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