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Common Questions
⚠️ This article is for informational purposes only and does not constitute legal or tax advice. Please consult your attorney or tax advisor before making any decisions.
An important step on every independent consultant’s journey is determining how and when to set up a formal business entity. Common questions include:
- Do I need a registered business entity?
- If so, which type?
- How and where do I set it up?
- What do I need to keep in mind for the future?
Let’s dive in and talk through each one.
Do you need a registered business entity?
The short answer is no, you don’t need a business entity created as an independent consultant. Many consultants don’t have one, especially when they first get started.
However, there are significant benefits to having a business entity. For that reason, many consultants end up forming one as they first get started or after their first significant ($20K+) win.
But while not legally required, having a formal business entity unlocks several key advantages:
- Tax benefits: You could reduce or even minimize the so-called “self-employment tax” if you pay yourself a salary through your own entity (please consult your CPA for your specific situation)
- Easier separation of business & personal: Year-end taxes are extremely complicated if you and your accountant need to go through your bank statements to figure out what was a business expense vs a personal expense. An entity & bank account used for business expenses can simplify this process and improve audit protection.
- Access to business liability insurance: Many insurance carriers won’t offer E&O (errors and omissions) insurance to an individual without a business entity
- Liability: If you are the target of a lawsuit, the entity could be sued instead of you personally. This may limit your personal liability.
The cost to set up a business is low relative to the benefits gained.
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Types of Business Entities
If you’ve decided a business entity makes sense, the next step is to decide which type to set up. In the U.S., the most common business structures for consultants are:
- Sole Proprietorship: The simplest option: no separate legal entity, minimal paperwork. You report your business income on your personal taxes.
- ✅ Easiest to set up
- ✅ Enables you to open business bank accounts and potentially receive business insurance
- ❌ No legal separation between personal and business liability
- ❌ Can make tax preparation messier as you grow
- LLC: The “default” choice for most independent consultants.
- ✅ Personal liability protection
- ✅ Eligible for business insurance
- ✅ Can elect to be taxed as an S-corp (see below)
- ✅ Simple to set up and maintain
- ❌ Slightly more paperwork than a sole prop
- Corporation (C-Corp or S-Corp): The most sophisticated form of business, typically used by large companies and high growth start-ups. A corporation requires more setup cost and more complicated taxes for the owner.
- ✅ Offers strong legal protections
- ❌ More expensive to maintain
- ❌ Requires additional corporate governance
- Note that some consultants elect S-corp status once they’re consistently earning over ~$100k per year, which can provide meaningful tax savings. Connect with our partners at Collective to learn more about setting up an S-Corp.
Pro Tip: Most consultants choose to form an LLC early in their journey because it offers a great balance of protection, flexibility, and ease. You get the benefits of liability protection and corporate benefits, but with nominal cost and without complicating your taxes.
Don’t forget: we are not attorneys and are simply sharing what we see most consultants do. You should still evaluate what’s best for you.
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How to set up an LLC
Fortunately, setting up an LLC is very simple.
Note, these recommendations are geared towards US-based consultants. It is possible to open a US LLC as an international consultant. However, there are more steps associated. For that reason, we would recommend consulting an attorney if this applies to you.
Registration Location
LLCs are formed at the state level, not nationally. As of this article, every state supports the LLC.
Pro Tip: Register the LLC in the state where you live. Some consultants get tempted by Delaware’s reputation as a business-friendly state. While Delaware has advantages for corporations (like a specialized court system for business disputes), forming a Delaware LLC when you live elsewhere often creates more complexity than benefit. You’d need to register in both states—and file more paperwork. This extra step of needing to register the business in your state creates added complexity and cost. For that reason, it is much simpler to create a business in the state where you live.
Registration Creation
For LLC creation, you can use any online service that will create and file the required documents on your behalf with the state. In most cases, they will also be your Registered Agent. Each state requires a Registered Agent that is the state’s point of contact for you and your business. The online services can typically do this for you each year for a nominal fee.
Catalant’s Recommendation
At Catalant, we recommend using Doola. Doola is a one stop shop for entity formation. They will form your company, get your EIN and help you open a business bank account. Plus as a Catalant Expert you’ll get preferred pricing. You can get started with them or schedule a free consultation call with them here.
Pro Tip: Let the Registered Agent use their business address as your LLC’s official address. Otherwise, you’ll receive a flood of promotional junk mail at your home.
Expect to spend $300-$500 to set up your business and receive all official paperwork.
Pro Tip: One particularly important document is your EIN, which will enable you to open a business bank account. You cannot do so without it.
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Future Considerations
Once your LLC is up and running, there are a few next steps to operationalize your business. Those primarily are:
- Business Bank Account: Open a dedicated checking account in your business name. This helps separate personal and business expenses and simplifies tax filing. You’ll need your EIN and Articles of Organization to open the account. Read more here.
- Accounting & Bookkeeping: Set up a simple accounting system using tools like QuickBooks or Collective, and track revenue and expenses from day one. Read more here.
- Business Insurance: Clients, especially larger companies, may require General Liability or E&O Insurance. Once you have a legal entity, many providers, like Berxi or Draftrs, offer affordable coverage options for independents specifically. Read more here.
- Payroll & Tax Elections: As your consulting revenue grows, it may be worth paying yourself a salary and electing S-Corp tax treatment. This is often worth considering around $100k gross income to reduce self-employment taxes. Consult your tax advisor or set up an obligation-free call with Collective to learn more and evaluate your best options.
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Final Thoughts
Forming a business entity is a key milestone in your consulting journey. While it’s not legally required to get started, it offers real advantages—from liability protection to tax flexibility to insurance eligibility.
Most consultants find that setting up an LLC is a simple, worthwhile step, especially after their first major engagement.
Take the time to get it right, and you’ll not only be more protected, you’ll look more professional and be better prepared for growth. In addition to considering if you want to form a legal entity, you’ll need to think about other critical foundational steps like setting up a business bank account as you start forming your independent practice. Learn more about setting up a business bank account here.