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LCC for a Consultants & Consulting Business Licenses

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As America's leading provider of business formation services in all 50 states, The Company Corporation can help you incorporate or form a limited liability company in just 10 minutes, at a lower cost than most attorneys.

I am a consultant with clients in my home state and also in several other states. Where should I incorporate or form my LLC?

Many of our customers incorporate or form their LLC in the state where their company conducts the majority of its business. However, in deciding where to form a company, there are many factors to consider, such as the cost of formation, tax laws, and other laws governing the actions and liabilities of the LLC or corporation within each state. Another factor that our customers consider when forming a company in a given state is that the company may also have to qualify to do business in other states where it conducts business.

The costs of forming and qualifying a company to do business may be an important factor to consider in determining where to form the company. For example, if a consultant is considering forming a company in Delaware but all of its services are performed in or for clients located in New York, then the consultant may elect to form the company in New York (and not Delaware), and avoid the dual costs associated with forming the entity in Delaware and then qualifying that entity to do business in New York.

Popular states to form an LLC or corporation in include Delaware, California, Florida, New York, Nevada, and Texas.

Do I need to qualify or register my company in each state that I have a client located?

If a company does business in a state other that the state in which it was formed, it will likely have to register or "qualify" to do business in that state. The LLC or corporation is often referred to as a "foreign" LLC or corporation in states other than the state in which it was formed. Whether or not the company must qualify in a particular state depends upon the laws of that state, which may vary from state to state. Also, a company may have to obtain a separate business license to conduct business in certain states or municipalities. Once again, the laws of the state or municipality involved will determine whether or not the company will be required to obtain a separate business license.

Generally, qualifying a company to do business in a state other than its state of formation is similar to the formation process, and the LLC or corporation may be required to pay filing fees and provide certain information and documentation to the state. Also, if a company is required to qualify to do business in a state but fails to do so, it may be subject to penalties.

Does my company need to file tax returns and pay taxes in the other states with regard to the income that it receives for services performed in those states? If so, where should it file?

Whether or not a company must file separate tax returns in a state where it performs services, and/or pay taxes directly to that state, depends on the state tax laws and the company's operations in that particular state. Many states require companies that perform services in the state to file a separate tax return and pay taxes directly to that state based upon the services that the company provides to clients in that state. Additionally, states may allow a credit for taxes paid to other states with regard to income from services performed in those other states.

Generally, in determining whether or not a consulting company must file tax returns or pay taxes to a particular state, the state may consider the connection or "nexus" that the company has to the state. In making such a determination, states typically consider factors such as the frequency and magnitude of services the company provides in a particular state or for clients in a particular state, or whether the company has a physical presence in a particular state, such as employees who conduct business activities or an office located in that state.

If our company is qualified in a state, does that mean we have to file a tax return for that state?

It is important to note that whether or not a company must file a tax return in a specific state is not necessarily determined by whether that company is required to register or qualify to do business in that state. For example, a company may not be required to qualify to do business in a state, but could nonetheless be required to file a tax return.

The amount of income that must be reported, permissible deductions, tax rates, required tax forms, and tax-filing dates may differ significantly by state. In light of the differences in the tax laws between the states, we find that many of our consultant customers hire qualified tax professionals to provide tax advice and prepare the company's tax filings in each of the states where required.

How does my company help to ensure that the individuals that it uses as contractors will be considered contractors and not employees of the company?

As a general matter, there are numerous factors that may be relevant in determining whether a person is deemed an outside contractor, rather than an employee of the company. For example, it may be helpful to demonstrate that the contractor: (i ) works at his or her own facilities; (ii) does not require training from the company to perform the required services; (iii) maintains the authority to control how the work is performed; and (iv) has been retained for a specific project rather than on a long-term basis. It may also be helpful to establish that the contractor provides services to entities other than the company, and is paid a flat fee, rather than an hourly wage, for the services performed for the company.

We find that many of our consultant customers enter into agreements with contractors that explicitly state that the contractor is an independent, outside contractor, and that the contractor (and not the company) shall be obligated to pay all payroll and related taxes relating to services provided to the company by the contractor.

In addition, we understand that some of our customers attempt to ensure that their contractors will be considered independent contractors, and not employees of the company, by requiring the contractors to be incorporated or organized as a limited liability company, and also requiring that the contractors actually employ the individuals performing the services. If a contractor is a corporation or a limited liability company with its own employees, it may be more likely that its workers will be considered the contractor's employees and not the company's employees.

Even after taking the above steps, if a company too closely supervises or controls the work done by its contractor, the contractor (or the contractor's employees) may be deemed to be the company's employees.

If contractors that you are using are not incorporated, you may refer the contractor to The Company Corporation to help them incorporate or form a limited liability. To learn more about partnership opportunities with The Company Corporation, click here.

When will my company have to be concerned with payroll tax implications?

A company typically will need to be concerned with payroll tax implications when it has employees. Generally, employers are required to withhold income, social security and state and federal unemployment taxes on the wages it pays to its employees. Due to the numerous rules and required filings with regard to payroll and related taxes, and the state and federal penalties that may be imposed for failure to comply, we find that many of our consultant customers hire tax professionals to provide tax advice and prepare the necessary tax filings on behalf of the company.

Do I need to provide Worker's Compensation coverage for contractors or sub-contractors involved with my company?

Workers' Compensation is a system created by each of the states to provide benefits to workers who are injured while working. The benefits may include medical care, temporary disability payments, and compensation for permanent impairments.

Workers' Compensation laws vary significantly by state, and whether a company is required to obtain Workers' Compensation insurance will depend upon the statutory law of the state where the work is being performed. Generally, if a company has one or more employees, it will be required to obtain and maintain Workers' Compensation insurance for its employees.

A company's contractors or subcontractors are not generally covered by a company's Workers' Compensation insurance.

For your convenience and reference, our web site lists each state and its Workers' Compensation rules. Learn about Workers' Compensation in your area.

Should my company purchase and carry business insurance?

We find that many of our consultant customers purchase and carry business insurance to provide liability and other protection for their business. Consultants often conclude that personal or homeowners insurance will not provide sufficient protection for even a small, home-based consulting business. Issues such as whether it is beneficial for the company to obtain business insurance, the type of insurance to obtain, and the appropriate amount of insurance coverage will vary significantly based on the activities of the consulting company.

There are many types of insurance that are available for a consulting business, including professional liability insurance to protect against claims for alleged negligent or otherwise deficient services. Also, a consulting company, especially if it has offices and employees, typically will obtain general business insurance to provide protection with regard to the types of claims common to all businesses, including property, workers' compensation, and liability claims. In addition, some of our customers acquire business interruption insurance, which provides coverage if the event that the company is forced to cease operations for a period of time due to certain events.

Does my company's insurance coverage protect it from claims made by clients in connection with the advice or services that my company renders to them?

Whether or not the business insurance protects the company from claims made by clients in connection with advice or services that the company renders will depend on a number of factors, including the type of services rendered, the nature of the claim, and the terms and limits of the insurance coverage that the company has purchased. An insurance policy will provide protection only against certain claims, and may not cover all of the losses incurred by the company. In addition, the policyholder may be liable for any judgment that exceeds the coverage included in the insurance policy.

In light of the variety of risks that a consulting company may face and the many types of insurance available, we find that many of our customers seek the advice of a knowledgeable risk management professional or insurance agent in order to determine what types of insurance and amounts of coverage are appropriate for their consulting business. Sole proprietors and partnerships may be held fully liable for bad debt and legal claims. Certain types of insurance can protect a sole proprietor or partnership against claims, however, incorporating or forming a Limited Liability Company may better serve to protect against certain claims.