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Should I setup an LLC for my consulting?
I have had a varied work history for the last decade but it has all been W-2. I now find myself doing consulting engagements and I am wondering if I should setup an LLC for this work. My main concern is actually limiting liability, and of course I am interested in possible tax advantages.
Has anyone else done this? If so, what’s the best way to set this up? Stripe has a program, I imagine legalzoom does as well..
IANAL so proceed at your own risk.
Assuming you're in the USA, I'd definitely suggest setting up a LLC to limit your liability. They're inexpensive and will protect your personal assets so long as you don't "pierce the corporate veil" which basically means to sign all business docs with your LLC name and to have a bank account in your LLC name.
You can read more about that here: https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html
If you're used to filing your taxes via something like Turbo Tax you'll likely need to spring for the small business version which is a little bit more expensive. If it's just you (no partner) then having the LLC won't really change much with your taxes - you'll be considered a "disregarded entity" or "pass through entity" and pay taxes (including self-employment tax) much the same way as you have in the past. The big difference is you'll file a schedule C that breaks down your revenue and costs. It's pretty simple and no different than if you ran a sole proprietorship.
Here is info from the IRS: https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies
You may want to get a Registered Agent or list yourself as one (but that'll make your address public in many states). A RA is someone who is available 24/7 in case someone sues you, they'll get served and then relay to you that the LLC was served. The RA is a recurring cost and is often a service offered by whomever helps you open an LCC (or you can do it yourself, it's not usually hateful).
Lastly, you'll need an EIN to open a bank account (like an SSN for your LLC) and those are free to get online from the IRS.
I hope that's enough to get you going.
I use Wave and like it. It's free and can connect to my bank. Just my .02.
Thank you for this solid information. Yes, this will be US based. I live in Washington state, any advice on the state for the LLC? Is Delaware smart even for consulting?
Also, have you had any experience with any online startups that do this legal service successfully? Or is hiring a personal attorney absolutely necessary?
Thanks again for all of your help.
Edit: the online services I meant are like Stripe Atlas, Clerky, etc.. these are aimed at “startup founding” which is why I am wondering if they are useful in the case of consulting.
I can only really tell you about my experience. I originally opened a LLC in my home state but realized I was paying sales tax for no real reason. I since filed for a Wyoming LLC to avoid paying sales tax. The laws on Sales Tax differ from state to state and it's something to research before setting out. Research "nexus" and your state to find about more.
I can't recall who I used to set up the first LLC but it was an online service. I used one specific for Wyoming for the second. I'd look at a LLC service rather than a "start up" service (that's just a small business unless you're uber lol). They're all pretty similar and provide the same things as it's mostly a convenience service - you can do it all yourself if you're so inclined.
Just know that you're going on a little bit of a journey and the best thing you can do is to dive into the research part of it.
I am not a lawyer but I do work in insurance and handle a lot of start up business accounts.
Definitely set up an LLC, you are personally exposing yourself to a lot of liability without one. Then get insurance. Your risk is not completely removed by being an LLC and it is possible for the corporate veil to be pierced. I would personally recommend against incorporating in a state other than the one you're domiciled in for insurance purposes it is going to make it tough to secure coverage.
I would say the three backbones of a business are legal, accounting, and insurance. If you are serious you should consult professionals in these fields.
Would you advise OP to get a personal umbrella policy (just in general)? I have one and it seems like a great deal for the cost. It'd give OP another layer of protection. What about a business liability policy? We had one of those for my wife's salon at one point.
Personal umbrella is good to have but won't cover any liability from business pursuits, so wouldn't directly apply to OP's situation. Umbrellas are an extremely cost effective way to reduce your exposure to liability lawsuits though. Medical costs are insane and one car accident that sends someone off in an ambulance is going to eat up state minimum limits in most states, then if they get checked out, stay there for a few days, have to go a chiropractor, and miss time off work you're looking at a six figure bill. That's just for one person. Get an umbrella y'all, they're usually about 10 - 35 cents a day.
Business liability, absolutely OP should get. Anyone with a business should, because expensive claims happen to people who weren't expecting them every single day. A lot of homeowners and companies are getting smart and requesting certificates of insurance too, so being insured helps grow the business that way. However I can't make any specific recommendations to anyone, I would say it's always a good idea to contact an agent. Commercial insurance is very complicated and shouldn't be a DIY product.
Would you say this holds true for online-only business that offer information products? Or would that be more of an edge case where business liability wouldn't really be reasonable.
For a business like that, they may not have much liability in a 'slip and fall' sense which is covered by a general liability policy. However, they have a lot of cyber liability. Say they get hacked or ransomwared on the day before cyber Monday - a decent cyber policy would pay what they should have made by selling their goods and also to fix the ransomware. Data breaches are another big risk for that kind of business, and dealing with them requires specialists that a small business owner probably can't afford. The cost of losing personally identifiable information is around $200/record.
Thanks!
That is always solid advice. Do you, or anyone else have a ballpark on what that would cost in the Seattle area? Or at least how many hours would I expect to get billed for?
I did a 30 minute consult about sales tax for $75 - but in the midwest. Setting up an LLC with an in-person lawyer can run you several hundred dollars up to whatever you want to pay. Online services are generally cheaper and the cheapest is to do it yourself. It's usually just a form or two you file with your Secretary of State.
I don't know if it's the case in the USA as it is in Canada but corporations have massively more complex accounting over sole proprietorships and is practically impossible for a layman to manage. So if you do decide to incorporate I highly recommend you find a corporate tax accountant before you do, they might even set it up for you. It's not going to be cheap but, from experience, it's way cheaper than finding one later when you realize you're in over your head.