Do I need an LLC for my consulting work?

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?

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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!).

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LLC vs Sole Proprietor

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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?

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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?

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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?

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

• To check if a name is trademarked, search here

• 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?

Setting up your LLC

‍Click here to set up your LLC through our partner, Northwest Registered.

The base fee is $39 for formation, plus applicable state government fees set by your state. See instructions below:

Step 1) Once you arrive at the landing page, click “Let’s Get You Started”:

Step 2) Select “LLC” as the desired service, and below that, select the state in which you are based in the dropdown menu (for the purpose of this how-to, we will incorporate in California, as an example):

Once you select your state, you will see the applicable state registration fee appear for your state. These state-determined registration fees vary from $20 to $300+, depending on your state:

Step 3) Insert your desired name for your LLC, and insert a simple, one-sentence business purpose that represents the core business activity of your business. Once you have filled this out, click “Continue”:

Step 4) Select “Member managed” for your business governance type. Fill out the name of the person managing the business (your name):

Step 5) Choose the address structure you want to be recorded with your state government. If you will be present at your own address most of the year to receive regular mail on behalf of your business, then select “Your mailing address” and fill out your regular mailing address:

Note: If you reside or work away from your registered place of business more than half of the year, it is highly recommended that you select “Our registered agent address” to add a registered agent service (a representative designated to receive service of process and official mail on behalf of your business) to your LLC:

Step 6) On the next two pages, create a password, then proceed to fill out your personal contact details, and then continue:

Step 7) On the “Optional items” page, you will want to elect for a Tax ID, assuming you want to open up a business bank account for your LLC:

Note ‼️If you expect your business to earn over $100,000 a year and/or you have employees, it’s advisable to select “S Corporation Election With The IRS” on the Optional Items page. Check with your accountant, and learn more about S Corps here.

Step 7) On the Payment page, insert your payment details and pay, and you are done! Depending on your state, it should take anywhere from 5-10 business days to be notified of your LLC registration with your state, directly by email through Northwest Registered Agent. You will also receive instructions in your email to login to your Northwest Registered Agent online portal to manage any necessary documents related to your LLC.

A few FAQs as you go through this process:

What state should I set up my LLC In?

• Set up your LLC in the state you live - this avoids paying unnecessary additional state fees.

Is the name of my LLC important?

• Honestly, no. It will only really show up on the contracts you sign. We recommend making the name of your LLC either something surrounding your name (e.g., BJacobs, LLC) or something else you like that sounds professional.

How do I check if the name I want is trademarked?

• To check if a name is trademarked, search here (you’re looking for “Basic Word Mark Search”)

• Each state has a different website for the entity search to make sure the name you want isn’t already being used. You can find the right link for your state here

Do I have to use the name of my LLC on all my marketing materials?

• If you’re thinking about calling your LLC one thing, but operating under a different name, it’s probably easier just to name your LLC the name you want to operate under.  
• If for instance, you have multiple revenue streams and really want to operate under a different name for one or more of them, you’ll need to register your ‘doing business as’ name (DBA) with the county clerk in which you live/operate.

What about business license requirements?

• Some local municipalities have business license requirements for businesses (usually all types of businesses, not just LLCs), and you’ll want to check your local city/county website to see if a business license is required.

Do I need to buy a registered agent service?

• When setting up your LLC, if you will be away from your registered business address often, it’s strongly advised to add a registered agent service to your LLC formation. A registered agent is a person or company designated to receive service of process and official mail on behalf of your business. Learn everything there is to know about registered agents here.  

What if I’m considering S-Corp status?

• An S-Corp is a tax classification, not a legal one. So you can have your LLC taxed as an S-Corp, and depending on your situation, you might take home way more money if you do. That being said, you do not need to decide this now. You can file the election later whether you do it on your own or have Northwest Registered make that change for you. (You can learn all about the difference between LLCs and S Corps here.) Please note this doesn’t change the underlying legal entity of an LLC - in the eyes of the State of incorporation you’re still an LLC from a legal entity standpoint and you’re subject to that State’s rules and fees. We’re happy to do that tax analysis for you if you’d like, just email us at [email protected] or book a call with our licensed CPA to discuss.

As a 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, feel free to book a call with our licensed CPA.