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LLC For Consultants and Consulting Businesses
Every industry has a need for a consultant. So, if you have the expertise, licenses, and professional experience to offer your services, you can. But to legally operate your business, you need to register it first.
Starting a new business can often feel overwhelming—but it is less complicated when you are forming an LLC. Plus, LLCs have a lot of perks consultants and other solo business owners. We have compiled a detailed guide explaining how to set up your LLC and why.
Definition
What Is An LLC?
In contrast to traditional corporations, owners of Limited Liability Companies (LLCs) are not personally accountable for the debts and obligations of their business.This means that in the event of bankruptcy, authorities will never force you to forfeit your personal assets, like properties and bank accounts.
Nonetheless, fraud could happen once in a while. If the members of your LLC commit fraud or fail to provide necessary legal reports, creditors can and will hold you personally liable.
Another key benefit is that LLCs do not directly pay taxes on their income. Anyone can also own or be part of an LLC. This means that everyone, including other businesses and multinational enterprises, is welcome to join yours should you decide to expand.
Advantages
What Are The Advantages Of A Consulting LLC?
There are many advantages to choosing to establish your consulting LLC. However, it is important to note that many of these advantages vary depending on which state you decide to open your business in. Some of these advantages include the following:
Limited liability
If the company were to go bankrupt or be in debt, you will never be held personally accountable for paying off the debts.
Pass-through taxation
LLC owners will not be subject to double taxation. Double taxation is when the owners or members are taxed twice on the business’s commercial profits and their shares or income.
Other tax benefits
Multiple taxation benefits are offered depending on which state you choose to open your LLC. Many different states offer tax incentives and programs to new and small businesses, which can be very beneficial for the growth of your business in its initial stages.
Disadvantages
What Are The Disadvantages Of A Consulting LLC?
Consulting LLCs do have a couple of challenges to face. Below are some that you need to be aware of:
Transfer of ownership
Transfer of ownership in an LLC may get complicated, as all members must agree on that and any other important decisions. This can often lead to arguments and disagreements, which can cause quite a few issues in the short and long run.
One type of business
Expanding your business by opening another consulting company in the same industry is permissible under the same LLC. But if you’re branching out to other sectors or opening a company not related to consultation, you cannot do so under your current one.
When opening a consulting LLC, the advantages outweigh the disadvantages by a considerable margin.
LLC Formation
How To Create A Consulting LLC
Forming a consulting LLC is not as complicated as you think. If you stick to the steps below and consult a professional in the business, you can accomplish everything in less than a month.
- Name your LLC
- Choose a Registered Agent
- File the Article(s) Of Organization
- Get your EIN Number
- Create an Operating Agreement
Name your LLC
The first step is to choose a name for your business. The business name should follow the naming requirements set by whichever state your company is in. If you can decide on one yet, we recommend that you reserve one anyway in advance in case someone else wants to take it. The Secretary of State will hold it for you for 120 days.
Choose a Registered Agent
Next, choose a registered agent for your LLC. Registered agents collect and manage essential official and legal papers on behalf of your business. Your business’s registered agent may be a private individual (like you) or an outside entity.
A registered agent has to follow these guidelines:
- The company you choose to represent your LLC must offer registered agent services.
- The registered agent must be present in their office and receive all the documents during business hours.
Depending on the state you choose to form your consulting LLC in, the registered agent fees and rates may change.
File the Article(s) Of Organization
Depending on the state you are in, you need to file your Articles of Organization to the secretary of state’s office. Filing the Article (or Articles) of Organization establishes your LLC as a legit business. It costs around $100 to submit Articles of Organization in most states, but it could be less or more in others.
The Secretary of State will review your Articles of Organization after you have finished and submitted them. After review, they will provide you a certificate confirming the formation of your LLC and its registration with your state. With the help of this certificate, you can open a business bank account and obtain an EIN.
Get your EIN Number
An EIN, or Employer Identification Number, is a nine-digit number that the IRS issues to your company and makes you liable for paying taxes. It even lets your consulting LLC create a business bank account and hire employees. Sole proprietors and partnerships do not enjoy these benefits.
Create an Operating Agreement
The operating agreement is an official document that sets down the general business practices of your LLC. It is not required for all LLCs. However, it can prove helpful in many situations. For example, you can prevent most financial disagreements by drafting an operating agreement. Transfers of ownerships can also be smoother with one in place.
LLC Taxes
How Are Consulting LLCs Taxed?
Limited liability businesses enjoy flexible tax advantages over other business arrangements. There are three main ways your consulting LLCs can taxed:
Single owner
You can choose to be taxed like a sole proprietor. Earnings from LLC members are recorded as personal income and are taxed as expenses on personal tax returns.
Multiple members
The business is taxed like a partnership, so all owners of the company split taxes equally. All members of the LLC are responsible for filing their income as self-employed entities.
S/C-Corp
You can tax your company as a corporation (double taxation) with all the benefits of one. Deductions, losses, and credits of corporations are distributed among shareholders. This model is recommended if you are earning higher profits and are looking for investors.
Other taxes may also apply to your LLC depending on your jurisdiction. Some states have higher tax rates, while others enjoy lower ones. Do your research before choosing which state to open your LLC in.
Costs
What Are The Costs Of Starting A Consulting LLC?
There are various costs associated with forming any LLC. Plus, just like taxes, these depend on the state you choose to set up your consulting LLC in.
LLC Costs
State filing fee
$50+
Registered agent service
$100+
LLC formation service
$50+
Operating agreement
$200+
Business license and permits
$50+
Employer Identification Number (EIN)
Varies
Initial legal and accounting fees
$200+
Equipment and supplies
$500+
Marketing and advertising
$500+
It is also important to consider the expense of hiring a registered agent should you choose to get one. Registered agents rarely offer their services for a general fee. Check their services and packages. Make sure you avail of the one that your business needs.
Consulting businesses play a vital role in providing valuable advice, assistance, and training services for companies across many industries. If you are looking to eventually expand your consulting firm and enjoy many tax benefits, forming an LLC is a smart choice.
For a more detailed overview of forming LLCs in various states, check one of our guides below:
Comparisons
Is LLC The Best Entity For Me?
Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.
LLC vs Corporation (C-Corp)
Sole proprietorships and Limited Liability Companies (LLCs) are two of the most common business entities for individuals and small businesses. Learn what differentiates the two today.
LLC vs S-Corp
Not sure what business structure to choose? Learn about the key differences between LLC and S-Corp today.