Forming an LLC for Consulting

Independent consultants understand the importance of choosing the right business structure, as it can be important in building trust with potential clients and can also impact your business activities. Many people choose an LLC for consulting work, as it can provide liability protection for the owners without the tax disadvantages of a corporation.

Should you set up an LLC for consulting work?

Many people find that a limited liability company (LLC) is the right choice for their business. Let’s go over some of the reasons why an LLC can be a great choice for a business owner. In an LLC, the business owners are called “members.”

Liability Protection

One of the biggest benefits of forming an LLC is that there will be a legal separation between the personal assets of the members and business assets. Having an LLC means that, in most cases, if the business is sued or goes into debt, only the LLC’s assets are at risk, not the members’ personal assets. Without a separate legal business entity like an LLC or corporation, someone suing the business could go after your personal savings, home, car, etc.

If you’re giving important advice to clients, you likely have a higher liability risk. Getting legal protection is essential for many people, even if they have relevant experience. When you’re providing the business services that a consultant does, you’ll most likely want to have the peace of mind that an LLC can bring.

Taxes

An LLC can make sense for tax purposes. In most LLCs, the business itself doesn’t pay taxes. Only the LLC owners will pay personal taxes on their percentage of the business profits. This is referred to as “pass-through taxation.” 

The other business entity that can protect you from personal liability, a corporation, has “double taxation.” Unlike an LLC or sole proprietorship, profits are taxed twice, first at the business level and again when those profits are distributed to the individual owners.

Another potential advantage of LLCs over other entity types is that the members can choose to be taxed as either a C corporation or an S corporation if that better suits their needs. For example, some LLC owners elect to be taxed as an S corp to lower the amount of taxes they pay for Social Security and Medicare. 

Flexibility

Choosing an LLC gives you more flexibility than a corporation. Corporations must elect a board of directors, and the structure for ownership and management is far more rigid. Plus, corporations have more meeting and reporting requirements.

Business ownership can be complicated enough, so choosing an LLC can reduce your paperwork so you can focus on other parts of your business.

LLC or Sole Proprietorship for Consulting?

Choosing an LLC is typically recommended for consulting, as a sole proprietorship will leave you at more risk. Getting additional protection is one of the smartest things you can do for personal asset protection, so consider if an LLC could be right for your business.

Single-Member LLC Consultant

You have an array of options when it comes to how you structure your business. As a single-member LLC, you’ll be able to keep all of the profits and will pay only personal taxes on them without having them also taxed at the business level.

Starting a Consulting Business LLC

Starting a consulting LLC begins by picking out a name that’s available. The next thing you’ll need to do is pick a registered agent that you can list when filing. Once you have your registered agent, you’ll be ready to complete and submit your Articles of Organization to the state and have an operating agreement put together.

After that, you’ll likely need to take additional steps, such as getting an employer identification number (EIN), getting any licenses and permits required for your business, and opening a business bank account to keep your business and personal funds separate. Check out our guide on “How to start a consulting company“.