Forming an LLC for Consulting

Choosing an LLC for consulting work can be a great decision for many businesses. This business structure makes sense for protecting personal assets and separating them from your consulting business.

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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“.

We can help!

Making sure that your business is formed correctly is essential. If you’re looking for support in that process, we can take you through the process of forming an LLC for your consulting business. We’ve helped thousands of business owners through the LLC formation process and have the relevant experience needed to help you succeed.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

LLC for Consulting FAQs

  • There are pros and cons to both of these options. Forming a limited liability company can help reduce risk to your personal assets, but you will have a filing fee to the state and complete some paperwork. If you choose a sole proprietorship, you won’t have a filing fee, but your personal finances might be impacted because of the higher liability.

  • An LLC is an excellent choice for a business consulting firm, especially if you’re a business owner looking to reduce personal liability without the red tape and double taxation of a corporation.

  • That’ll depend on your profession and the laws in your state, but it’s very likely. You’ll need to research your state and local laws.

  • The IRS rules about EIN requirements aren’t directly related to whether you’re in the consulting business. If your business has employees or multiple owners or pays excise taxes, you’re definitely required to have an EIN. But even if you’re not required to have an EIN by law, most banks won’t allow you to open a business bank account without one.

  • What you name your business is a very individual decision. You don’t legally have to put consulting in your business name, but it can be a good idea. It’s important to make sure that your business name conveys the service you provide or something fundamental about your business.

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