LLC for a Consulting Firm

Do you need an LLC for consulting?

If you’re considering launching your consulting business, one of the fundamental decisions you’ll face is choosing the right legal structure for your venture. In this guide, we’ll explore the ins and outs of forming a limited liability company (LLC) for your consulting practice. Forming an LLC offers numerous benefits that can provide you with peace of mind and financial security as you grow your consulting practice. From liability protection to tax flexibility, opting for an LLC structure might be the right choice for you.

Operating as an LLC can enhance your credibility in the eyes of potential clients and partners. It demonstrates a commitment to professionalism and responsible business practices, which can help attract clients and opportunities. Additionally, LLCs offer flexibility in how they’re taxed, allowing you to choose between pass-through taxation or electing to be taxed as a corporation, depending on what suits your business needs best.

In this guide, we’ll walk you through everything you need to know about starting an LLC for your consulting firm, from why it matters to how to start one and everything in between. 

Why Starting an LLC for a Consulting Firm Is Important

Personal Asset Protection

The top reason to form an LLC for an independent consulting business is to gain access to the personal asset protection provided by this business structure. Whether you work alone or with a team of fellow consultants, you need the limited liability protections that an LLC can provide.

As an example, let’s say that you (or one of your co-owners, or one of your employees) provide a client with bad advice that costs them a considerable sum of money. Perhaps they even feel that your business operated in a fraudulent or negligent manner. If you operate your consulting firm as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that customer decides to sue your business.

On the other hand, if you form an LLC for your consulting firm, and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will usually be limited to your business assets. In other words, LLC owners are protected from business debts thanks to the business structure you’ve chosen.

Taxation

However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a consultancy firm. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business structure.

Sole Proprietorship/General Partnership

Your consulting LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your consulting firm itself does not pay taxes, but rather the business profits are passed through so the LLC owners pay income taxes on that money when they file a personal tax return.

C Corporation

You can also choose for your firm to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to each business owner.

S Corporation

The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most consulting businesses have no trouble meeting these requirements — your business cannot have more than 100 owners, and they all must be either residents or citizens of the United States.

S corp taxation can help your firm save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.

Compared to operating a sole proprietorship or general partnership consulting business, the S corp taxation model can save you quite a bit of cash that you can use to make improvements to your office space or deal with other business expenses rather than writing a big check to Uncle Sam.

Enhanced Credibility and Name Uniqueness

Finally, an LLC structure can enhance the credibility of your consulting business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a consulting sole proprietorship, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a firm.

In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another business wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.

With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.

What is an LLC?

LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself doesn’t owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.

There are similarities to corporations, too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.

Finally, an LLC is a separate legal entity from its owners; it can own property, hold its own bank account, enter into contracts, and so on. This legal separation is actually the foundation of an LLC’s personal asset protection, so it’s vital that an LLC’s members treat it as a separate entity at all times. Intermingling business finances with personal funds can have serious consequences. For more information see our LLC definition page.

How to Start an LLC for a Consulting Firm

The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete LLC guide on the topic. The basic steps in the LLC formation process in any state are as follows:

1. Choose an LLC name

Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.

2. Designate a registered agent

Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — most notably service of process and annual report reminders (in some states) — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business.

3. File your formation documents with the state

The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.

4. Acquire an EIN

The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can obtain an EIN from the Internal Revenue Service free of charge.

5. File a BOI Report

New in 2024, your consulting firm LLC is required to file a beneficial ownership information report, or BOI report. You’ll file this report with the Financial Crimes Enforcement Network, providing vital information about your LLC’s “beneficial owners.” Beneficial owners are people who control the LLC or get significant economic benefit from it. It’s crucial to file this report by the deadline to maintain compliance; failing to file means you won’t be operating your consulting firm legally and you could face hefty legal and civil penalties.

6. Create an LLC operating agreement

Most states don’t legally require operating agreements, but every LLC should have one regardless. An operating agreement outlines several key operational aspects of your LLC. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.

7. Create a financial infrastructure

You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses, as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.

8. Handle taxes, licenses, and permits

Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. Depending on the exact type of consulting services your LLC provides, you may need to obtain a professional service license. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.

9. Understand maintenance requirements (annual reports, franchise taxes, etc.)

Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up to date in the state’s business database. Some states require reports each year, while others only require them biannually or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.

Additional Resources for Starting a Consulting Firm

1. Process Street

Process Street has plenty of great information for independent consultants, and their core service is a highly convenient workflow management tool. For the sake of this article, we’d like to point out their incredibly valuable “68 Small Business Resources to Make Consulting Easy” article. While it’s a few years old, the information in this article is as relevant as ever and should make your life as a consultant significantly simpler.

2. Case Interview

Owned and operated by a former McKinsey case interviewer, Case Interview shares tricks of the trade to help consultants land more business. Victor Cheng once passed an incredible 60 out of 61 case interviews and shares his methods with other consultants through a wide variety of case interview training resources, including videos, newsletters, partner matching services, and more.

3. Consulting Magazine

Consulting Magazine is one of the top resources for consulting firms, thanks to its wealth of knowledge and its comprehensive coverage of issues that matter to consultants. They balance evergreen content like the best firms to work for with timely and relevant articles about pressing issues in the consulting world, and they’re a great resource for consulting firms of any size.

4. Free Management Library

Looking for a convenient collection of consulting tools? Look no further than Free Management Library. Just on this one page, they have dozens of links to valuable insights regarding many different aspects of the consulting world, from problem-solving and collaboration to entrepreneurship and strategies.

5. Mashable Consulting Resources

Mashable’s list of 11 essential consulting resources has links to tools you can use to improve your marketing, recruiting, general productivity, and more. Not all of these resources will be relevant to every single independent consultant, but we’re confident you’ll find something interesting in this list.