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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.
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.
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.
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.
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.
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.
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.
LLCs provide greater operational flexibility compared to corporations. They have a simplified management structure with fewer formalities and reporting requirements. For example, you don’t have to hold a board meeting or annual shareholder meetings like you would with a corporation. You won’t have to draft bylaws, either. You’ll still have some paperwork and maintenance, but you’ll find that an LLC is simpler than a corporation.
This means you can focus more on your consulting work and less on administrative tasks. LLCs also offer more control over business operations, allowing you to manage your consulting practice in a way that best suits your needs and goals.
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 (see members definition). Intermingling business finances with personal funds can have serious consequences. For more information see our LLC definition page.
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:
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.
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.
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.
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.
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.
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.
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.
ZenBusiness is a financial technology company and is not a bank. Banking services provided by Thread Bank, Member FDIC.
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.
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.
Before you jump into registering an LLC, there are additional considerations to make. That way, you’ll be able to choose the best structure for your needs.
Forming a single-member LLC can be highly beneficial for the consulting business owner who prefers full control over their business. As a single-member LLC, you enjoy the same liability protection as multi-member LLCs, safeguarding your personal assets from business liabilities.
Additionally, single-member LLCs benefit from pass-through taxation, meaning business profits are taxed only once at your personal income tax rate. This structure combines the simplicity of a sole proprietorship with the legal protections of an LLC.
If you do go this route, stay vigilant to treat your LLC like a separate business entity, keeping your personal and business finances separate. Maintaining business formalities will help maintain your personal asset protection.
When deciding between an LLC and a sole proprietorship for your consulting company, it’s important to weigh the advantages and disadvantages. While sole proprietorships are simpler to set up and have fewer ongoing compliance requirements, they don’t offer liability protection. This means your personal assets are at risk if your business incurs debts or faces legal action. For more information please see: What is a Sole Proprietorship?
In contrast, LLCs provide better liability protection, separating your personal and business assets. Moreover, LLCs enhance your business’s credibility, which can attract more clients and improve your professional image. While LLCs involve more paperwork and fees, the added security and professionalism often outweigh these drawbacks.
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.
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.
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.
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.
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.
Starting a consulting business can feel like an overwhelming process, but it doesn’t have to be a solo endeavor. Here at ZenBusiness, we specialize in helping small businesses navigate the paperwork of business formations. Whether you need help registering your brand-new LLC, managing your finances with a money app, getting licenses and permits, or anything in between, we can help. Let us handle the red tape so you can focus on what you love: providing the best consulting services in town.
What liability risks do consulting firms face?
Operating a consulting firm without liability protection is extremely risky. If one of your customers thinks you provided erroneous or even fraudulent advice, you run the risk of a costly lawsuit.
Furthermore, a data breach could lead to extensive liability issues for your firm, as your clients line up to sue you one after the other for failing to protect their sensitive information. In short, protecting your personal liability with an LLC is a no-brainer for a consulting firm.
Why should I form an LLC instead of a corporation?
Everyone’s situation is different, and we’re not here to provide legal advice. That said, the limited liability company has some concrete advantages over the corporation that makes it the preferred option for many small businesses.
Corporations tend to have more complex formation and maintenance requirements, and they don’t have the taxation advantages of an LLC. The corporation has some advantages of its own (for example, it’s easier to attract investors to a corporation) that make it worth a look, but the LLC is a simpler and more flexible business structure.
Can I serve as my LLC’s registered agent?
You certainly can. Every state allows entrepreneurs to serve as their own registered agents. However, while the role of the registered agent can seem like that of an unnecessary middleman, there is more complexity to this position than some people realize.
For instance, you would need to be present and available at your business location during all standard business hours.
Why should I hire an LLC service when I can form my own LLC?
The do-it-yourself route is always an option for LLC formation. However, LLC services are so affordable that there’s really no good reason not to use one these days. In addition, some of these companies often throw in free bonus features that make them an even better bargain.
Need some additional information, check out our ZenBusiness vs LegalZoom page
Should I form my LLC in my home state, or choose a state like Delaware or Wyoming?
Some people like to form their LLCs in states with favorable legal settings. For instance, Delaware is often seen as the most business-friendly state, as it has an entire court system that’s dedicated solely to business matters. As for Wyoming, this state has some of the most generous anonymity laws for LLC ownership.
However, for most people, your best option is to simply form your business in your home state. Forming in a different state can be a tremendous hassle, and it can add some unnecessary complexity to tax issues, as well.
How much does it cost to form an LLC?
The costs of LLC formation can vary quite a bit depending on which state you’re forming one in. For in-depth information about LLC formation costs in your specific state, take a look at our comprehensive guide to state-by-state expenses.
Which is better for my business consulting firm — an LLC or a sole proprietorship?
An LLC is generally better for a consulting firm compared to a sole proprietorship because it offers personal liability protection, which means your personal assets are usually protected from business debts and legal actions. Additionally, an LLC can enhance your business’s credibility and professionalism, attracting more clients.
While a sole proprietorship is simpler to set up and has fewer ongoing compliance requirements, it doesn’t provide the same level of security and trust as an LLC.
That said, if you’re not sure which business entity structure is right for your business, we highly recommend chatting with a business attorney. They’ll be able to give you personalized advice.
Should a consultant form an LLC or S corp?
This question is a little misleading, actually — an S corporation isn’t a business entity type that you can elect; it’s a tax status that business structures can elect. So you can technically have an LLC that’s also an S corporation for tax purposes. Both standard LLCs and LLCs taxed as S corps will pay taxes like pass-through entities, but an S corporation can give business owners breaks when they pay self-employment tax.
If you’re not sure which structure is best for your consulting firm, then it’s recommended to consult with a tax professional.
Is an LLC good for a consulting firm?
An LLC can be a good choice for a consulting firm. It provides personal liability protection, tax advantages, and operational flexibility, making it easier to manage your business and protect your assets. Additionally, forming an LLC can enhance your credibility with clients, giving your consulting firm a more professional and trustworthy image.
Do consultants need a license?
Consultants may need a license depending on the nature of their consulting services and the state in which they operate. Some states and municipalities require specific licenses or permits for certain types of consulting work. It’s important to research the licensing requirements in your area to comply with all regulations and avoid potential fines or legal issues.
Do I need an EIN for consulting?
You need an EIN if you have employees, you have more than one member, or you meet one of the IRS’s other criteria for needing an EIN. It’s also essential for getting a company bank account. So even if you aren’t required to get one by law, an LLC can be an essential part of managing your LLC’s finances effectively.
Should I put “consulting” in my business name?
Including “consulting” in your business name can be beneficial as it clearly defines the nature of your services to potential clients. A descriptive business name helps in marketing and establishing your brand identity. However, check that the name you choose is unique and complies with your state’s naming regulations for LLCs.
What type of LLC do I need for a consultant?
A single-member LLC is often a suitable choice for individual consultants, offering liability protection and tax advantages while allowing full control over the business. For larger consulting firms with multiple members, a multi-member LLC can provide similar benefits with added flexibility in management and profit distribution. The type of LLC you choose should align with your business goals and structure.
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.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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