Why Should You Incorporate or Form an LLC?
Becoming a consultant is a great way to put your business experience and skills to use helping others improve their businesses. There are many types of consultants, from management consultants who help executives make their organizations more efficient, to IT consultants who help companies implement the right IT solutions, to philanthropy consultants who help nonprofit organizations raise funds. Whichever consulting niche you decide to focus in on, there are a few things you should consider first.
Do You Have What it Takes?
Answering some simple questions can go a long way in determining if you will be successful as a consultant. Take a few minutes to think through these couple questions:
- What marketable skills do I have? To differentiate yourself from the crowd, you'll need to specialize in a niche. For example, an IT consultant might specialize in cyber security issues; a management consultant might specialize in business process improvement. What specialty will you focus on?
- Am I good at sales? You'll need sales and marketing know-how to network, form relationships and pitch your services to clients. Consultants must constantly seek referrals and leads and be able to present their value in a clear and convincing manner.
- Do I manage time well? Consultants must be effective time managers to juggle their clients' demands and to maximize their billable hours. Keep in mind, not everything you work on is billable.
Before running out and pitching clients your consulting services or taking on large projects, you may want to consider incorporating your consulting business. Incorporating or forming an LLC as a consulting business can offer a number of advantages.
- Limit Your Liability: Since part of your professional duties involve advising others on their business matters, if someone feels that your consulting advice caused them damage, they can sue you to recover their losses. Without an LLC or corporation shielding your personal property from business liability, the losses you could incur are unlimited. Forming a corporation or LLC will keep your personal assets off-limits when it comes to satisfying business financial judgments.
- Tax Advantages: There are many tax benefits to incorporating or forming an LLC. LLCs generally have 'pass-through' taxation, but can elect to be taxed as an S Corporation if it's beneficial. S Corporations help you avoid double taxation of company profits and dividends. Be sure to meet with your accountant to fully explore your tax possibilities and make sure the corporate structure you choose meets those needs.
- Enhanced Credibility: When you form an LLC or corporation, you will be known publicly by your business name followed by 'Inc' or 'LLC.' This gives your businesses added professionalism and helps show that you are established and reputable. Some businesses may require you to be incorporated or have an LLC before they will work with you to avoid any confusion that that you, or your staff, might be considered employed by them if they work with you.
- Brand Protection: When you file as a corporation or an LLC, other companies cannot file with your company name. This helps protect your consulting company's reputation and also gives you a foundation for protecting your business and services from infringement.
- Expense Deduction: As an LLC or corporation, you will be allowed to deduct normal business expenses from the company income before the income is allocated to you. Business expenses can include items such as salary, rent (portion of your mortgage if you work from home), travel, mobile devices and more. This means that the money you put toward growing your consulting practice can be deducted from business income before your taxable income is determined.
There are a number of other steps and actions to consider when starting a consulting business. At incorporate.com, we consider ourselves experts at small business and entrepreneurial endeavors. We're happy to discuss your needs and the benefits of forming a more formal structure for your consulting business.
I am a consultant with clients in my home state and also in several other states. Where should I incorporate or form my LLC?
Most of the time, you will want to incorporate in your home state. However, there are factors that could lead you to incorporate in a different state you operate your consulting business in. Sometimes tax laws and cost of formation are more favorable in a different state. Other times a state you work in will require you to qualify to do business there. If a state requires qualification, you may choose to incorporate or form your LLC in that state to avoid double fees (incorporation and qualification).
Keep in mind that you will still need business licenses to operate in each state that you do business in, even if they don't have formal qualification standards.
How do I know what states I need to file tax returns in?
Each state will have its own rules for taxation, and it's important to do a lot of research or work with a tax professional. Many states consider the amount of business consultants do in the state, and how often you do business there. Some states also have an arrangement where taxes paid to other states can be credited towards overall income, allowing your paid taxes to count toward your overall tax burden. Some states may require an altogether separate tax return that only includes the income from business in that state.
Keep in mind that tax-filing deadlines may vary significantly from one state to another, and be sure to file on time to avoid penalties. Keeping all of this straight is tough, so working with a professional is ideal!
As a consultant, do I need to carry business insurance?
As a consultant, you'll probably find it wise to carry a specific business liability policy. Personal or homeowners insurance may not be sufficient to pay a judgment against your business, and a business insurance policy can also help create a financial barrier between your personal assets and your business assets.
What type of insurance to purchase and what level of coverage to choose will vary depending on the scope, size, and activities of your individual practice. You will want to carefully review any policy you buy so that you fully understand what coverage is provided and under what circumstances. For specific liability questions, you will probably want to consult a legal professional.
What is the law regarding Workers' Compensation? Do I need to provide coverage for contractors or sub-contractors involved with my company?
Worker's compensation is a state-based system created to provide benefits to workers who are injured on the job. The laws for worker's compensation vary a lot from state to state, but the coverage is generally only required for employees. Contractors and sub-contractors are not usually covered by your company's worker's compensation policy.
To make sure that it's understood that your contractors are not employed by you, you will want to explore the laws regarding how much control you can have over workers before they are considered employees. Generally, if a worker has their own facilities, does not need training or uniforms from your company, and works for other, similar businesses, they will be classified as a contractor. For specific legal questions, including setting up contracts, you will want to contact a legal professional.
Resources for Consultants
As a consultant, you offer advice and suggestions on how to improve, plan, or organize a business. We recognize your efforts and want to offer useful products and services to help you. From finding necessary permits to getting your Employer Identification Number (EIN), incorporate.com saves you time and allows you to focus on your true work – consulting!
For a full list of products and services we offer, check out Our Business Services. A few of incorporate.coms resources, along with suggestions for additional help, are below.
Below, we've put together a list of resources that are most relevant to consultants and consulting business owners.
- Incorporate or Form an LLC
- Business Licenses & Permits
- Employer Identification Number (EIN)
- Doing Business As (DBA) Names
- Corporate & LLC Compliance Kits
- Bylaws & Operating Agreements