Do I Need an LLC for a Consulting Business?

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LLCs offer pass-through taxation similar to a sole proprietorship or partnership with the limited liability of a corporation. Read on to learn all the benefits LLC owners have for their consulting business.

Protecting Personal Assets

LLCs provide personal liability protection for their owners. A single small business owner can operate as a sole proprietorship; however, their personal assets are at risk if someone sues the business.

Owners can choose to protect their personal assets by forming a separate business entity, such as a corporation or LLC. These business entities shield personal assets from lawsuits and business debts, and only the business assets are at risk.

Many single-person businesses favor forming a single-member LLC over a corporation because there are less burdensome requirements to set up and maintain. For example, LLCs do not have to have bylaws or keep records of minutes of meetings that corporations require.

Offering Tax Reporting Advantages

There are tax benefits to having an LLC, namely, only filing a personal tax return. LLCs do not have to pay tax on the business level like C-corporations, so they avoid double taxation. Instead, an LLC is a pass-through entity, and you can report your business income or losses on your personal income tax return.

Providing Credibility

If a potential client does not know you, it can be hard to convey your credibility as an independent consultant.

As a solo entrepreneur, you can either use your name, such as “Sam Smith,” or apply for a “doing business as” (DBA) registration to use another name for your business. For example, you could register a DBA for “Sam Smith Consulting.” However, a DBA does not provide personal liability protection like an LLC.

An LLC conveys professionalism and does not broadcast that you are a one-person operation. Suppose you are a business consultant; who do you think a potential client might hire: “Sam Smith” or “Strategic Solutions, LLC?”

Furthermore, when you register an LLC for consulting, you register the LLC name with the state, so no one else can use your business name.

Distinguishing Yourself as an Independent Contractor

Forming an LLC means there is a separate legal entity from yourself. This is a critical distinction for businesses looking to hire you as an independent contractor and not an employee. If the IRS classifies you as an employee of the business, the business must pay benefits and follow wage and overtime laws driving up their costs. A company doing business with your LLC is one piece of proof that you are not an employee but an independent contractor.

Many times, a person works for a company but then leaves and does consulting work for that same company. Having an LLC separates you from being classified as an employee.

How To Get an LLC

It is easy to form an LLC in the state where you operate your business. You can file Articles of Organization with your Secretary of State’s office. In the articles, you will include basic information such as:

• The LLC business name and address of the principal place of business

• The LLC’s business purpose

• Registered agent name and address for the LLC

• Names of LLC members and managers

You file the Articles of Organization along with the state filing fee with the Secretary of State. Once approved, you receive a Certificate of Formation for your LLC.

LLCs are easy to maintain but you may be required to file annual reports or biennial reports with the Secretary of State and complete a Business Owners Identification Report (BOIR).

Most states do not require an LLC to have an operating agreement, but you may want to have one anyway.

After Forming an LLC

Once you form your LLC, there are a few additional steps you should take:

Get an EIN for Your LLC

An Employer Identification Number (EIN) or Taxpayer Identification Number (TIN) is like a Social Security number for your business. You use this number to file taxes or open a bank account. It is easy to apply for an EIN online with the IRS.

Set up a Bank Account

You will want to open a bank account in the name of your LLC. Run all your business expenses and deposit all business income through your business bank account.

Get a Business License

Once you have your LLC, you will want to get a business license. Find out if you need a business license for the state or local town where you operate your business. Also, look into what permits you may need to run your business. For example, if you work from home, you may need a home occupancy permit or permission from your homeowner’s association (HOA).

When planning a consulting business startup or operating an established one, it is essential to consider the tax purposes and legal aspects of your business structure. Limited liability companies offer limited liability protection, flexible tax treatment, and ease of formation and maintenance.