If you want to limit your liability for the debts of your consulting business and also avoid paying high corporate taxes, a limited liability company (LLC) might be the business entity for you. However, an LLC isn't the only business entity to choose from, and you might find you would prefer the ease of running a sole proprietorship or the tax benefits of a corporation.
A consultant is a broad term that includes a variety of professionals who provide advice in their field of expertise, such as marketing, technology, or human resources. Any kind of consultant can use the information in this article, but every business is unique. Take the time to consider your goals and the needs of your company to determine if you should form an LLC.
LLCs are a popular business structure among consultants, and for good reason. Some of the benefits the owners of LLCs enjoy include:
An LLC is not the best choice for every consulting business, and you might find that a sole proprietorship, partnership, or corporation would better meet your company's needs (as discussed below). Some of the disadvantages of LLCs include:
To create an LLC, you must file paperwork with your secretary of state, which your state might refer to as "articles of incorporation" or "articles of organization." You should also create an operating agreement, which will provide the internal rules for how you'll run your LLC, including how you will split profits and responsibilities among owners, and what happens to the business if the owners are no longer able to (or wish to) run it.
As with any business entity type, be sure to research your local business licensing requirements and options for business insurance.
If you'd like learn your state's LLC formation process, see our state guide to forming an LLC.
You might consider other types of business entities, such as a sole proprietorship, partnership, or corporation. Each entity has a different structure, as well as the following advantages and disadvantages:
Sole Proprietorship: If you own the business by yourself (and in some states with your spouse) and do not register the business, you own a sole proprietorship. Like LLC owners, owners of sole proprietorships avoid corporate tax. The downside is sole proprietors are personally liable for the debts and obligations of the business.
Partnership: When you own a business with one or more other people and you do not register it with the state, you have a partnership. As with sole proprietors, partnerships avoid corporate tax, and the owners are personally liable for the debts of the business.
Corporation: The other option is a corporation, which offers liability protection and is attractive to investors, but is more expensive and time-consuming to form and maintain. Click here to read more about how to create and run a corporation.