Do I need an LLC for my consulting work?

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You don’t need one, but we recommend one. Why? As an independent consultant, you’re now running your own business. You’re contracting with companies, and while you can do that as an individual, if something were to go wrong, you would personally be liable. 

If you form an LLC and use that LLC to contract with the company, when set-up correctly, the LLC protects you personally. After all, the United States is the most litigious country in the world, so it’s to your benefit to keep your personal assets separate from your business assets. An LLC will protect your personal assets, limiting creditors or anyone filling a lawsuit, in most cases, to only collect from your business assets.

How do I use my LLC?

When you sign contracts with clients (please always do this!) you’ll sign on behalf of your LLC, so your client is contracting with your business  (which is your LLC). Then, you’ll have them send money to your business bank account (yes, you need one) and you’ll charge business expenses to your business credit card (yes, you need one!).

LLC vs Sole Proprietor

A sole proprietor is just you. When you operate as a sole proprietor (i.e. just yourself and your own name), you’re personally liable. So if a client or third party decides to come after your business because of a deal gone wrong, your personal assets could be at risk.

As mentioned earlier, having an LLC limits your liability by protecting your personal assets and separating them from those of the business. Even though it comes with a little more paperwork, most freelancers find that an LLC gives them greater peace of mind when running their business.

How does having an LLC affect my taxes?

Generally speaking, having an LLC won’t affect your federal taxes. By default, all the income from your LLC passes through to your personal tax return, just as if you were operating as a sole prop. You still get a 1099 from your clients at the end of the year, and all the same deductible expenses and write-offs apply, just like before.

Keep in mind though, you’ll still owe self-employment tax on your freelance profit at around 15%. These are the FICA taxes for Social Security and Medicare that everyone pays. You used to have half of these taxes withheld from your paycheck, while your employer paid the other half. Now that you’re both employer and employee, you’re responsible for both shares.

While federal taxes are fairly straightforward, state taxes, however, are a different story. Most states, and some cities or counties too, have a separate tax on LLCs that is due each year. This means your LLC will need its own state tax account, and possibly a business license, both of which will need to be kept up to date with annual filings and tax payments. Every state’s requirements are different, so it’s worth it to do your research and check with a tax pro (we offer this in Mylance Premium!). 

One tax reduction strategy is having your LLC choose to be taxed as an S Corporation with the IRS. An S-Corp is a federal tax status that allows your LLC income to be split into passthrough income and an owner’s salary. The details can get complex, but in certain scenarios it can drastically reduce your self-employment tax. This has state tax implications too, and isn’t always worth the extra paperwork, so be sure to check with us before making any decisions!

What state do I form my LLC in?

Knowing which state to choose when forming your LLC can seem like a daunting task at first. A quick internet search can make it even more confusing. Delaware, Nevada, Wyoming -- which state is best? Although it’s true that you can form an LLC in any one of the 50 states, for freelancers, we recommend a much simpler choice: Form your LLC in your home state. 

The main reason for forming your LLC in your home state is taxes. LLC’s are pass-through entities, which means the income generated by the LLC will be reported on your individual tax returns. So even if your LLC is registered in Delaware, and you live in Colorado, the income from your LLC will find its way onto your Colorado tax return whether you like it or not.

What should I name my LLC?

Make the name of your LLC either something surrounding your name (e.g., BJacobs LLC) or something else professional. 

  • Then, each state has a different website for the entity search to make sure the name you want isn’t being used. California is here 

How do I form my LLC?

In using multiple different platforms, we’ve consistently found that Incfile is the best solution (amongst the dozens of offerings). IncFile is incredibly simple to use, the best bang for your buck in terms of thoroughness and cost, and doesn’t try to upsell you on every little item like LegalZoom. 

Set up your LLC through Incfile here

(Note: the above link is an affiliate link that Mylance receives a kickback from. This is not why we recommend Incfile - we’ve used it and recommend it to everyone regardless if they use our link or not. It’s the easiest and best solution to date in our opinion)

For Incfile, we recommend the Silver package with the addition of them getting your EIN for you—it gets you started with the items you need while still being cost effective. 

As a side note and pro tip: you can get your EIN for free online if you want to do it yourself and save a bit of cash.

Lastly, how you have your LLC taxed depends on your state and personal situation. We’re happy to do that analysis for you if you’d like, just email us we’ll set it up.

Written by:

Bethany Swartwood
Head of Tax & Business Law, Mylance

I specialize in helping businesses-of-one and start-ups achieve financial and tax compliance while saving them tens of thousands of dollars each year.

Freelance Legal Questions?