Expert Perspectives: Why Form an LLC for a Consulting Business
As an independent consultant, you’ve likely thought about taking your business to the next level. Whether you’re operating as an individual, part of an informal network, or co-leading a boutique firm, creating a more formal business entity can bring substantial benefits to your practice and help you establish a strong presence with Catalant clients.
I went through the diligence process a couple of years ago and decided to form a limited liability company (“LLC”). An LLC has advantages and disadvantages depending on your unique situation but was the ideal entity for my consulting business. While you should of course consult with a professional who specializes in business incorporation and can provide guidance for your specific situation, below are a few considerations I took into account when deciding to form an LLC.
Benefits of Forming an LLC for a Consulting Business
1. Set a clear delineation between personal and professional finances.
Two years ago I started working with Catalant casually, as a side project. At the time I didn’t have to worry about separating personal and business finances because the income I was earning through the platform was a small percent of my total income. As my Catalant success (and earnings) grew, it became important to draw a clearer distinction between my personal and professional finances. Forming an LLC was a critical step in making this separation and has allowed me to manage my finances in a smarter way.
Protect your personal assets
An LLC will typically protect its members from personal liabilities related to debts and lawsuits originated and incurred by the LLC, effectively shielding personal assets from exposure to these risks. This was important to me because I want to make sure my personal assets are protected from external claims and lawsuits that could arise from employee negligence or fraudulency.
2. Create tax flexibility.
Single-member LLCs have the ability to pass through taxation. In other words, your LLC’s profits and losses may be reported on your personal federal tax return as self-employment income, helping you avoid additional tax preparation expenses and minimum tax fees for your LLC.
Depending on its structure, an LLC can also be considered a partnership or corporation for tax purposes if specified in the Operating Agreement outlined by the entity members. In certain cases, the IRS will classify LLCs as corporations for tax purposes automatically. It’s worth spending some time understanding the different IRS classifications and their impact.
3. Establish credibility with potential clients.
After a few months of working with Catalant, I began to engage with bigger, more sophisticated clients. Having established an LLC played an important role during the selection process for a major enterprise project. It was the first of many instances when I had to interact with a Sourcing Department in addition to project business owners. Sourcing professionals are more used to hiring companies during their day-to-day activities, and may not be completely familiar with the process of hiring an individual consultant. Forming an LLC helped me jump through those obstacles quickly during the selection process.
The advantages of forming an LLC don’t exist in a vacuum. It made a strong difference in my case because I also considered all the other aspects surrounding the establishment of a formal organization, including strategic positioning, marketing, financials, and organizational structure.
Many first-time Catalant clients are a bit hesitant to hire their first expert. Leverage your LLC to your advantage: use it as a tool to signal your experience and professionalism and demonstrate your commitment to your business and the Catalant platform!
Considerations When Forming an LLC for a Consulting Business
1. Long-term Organizational Implications
An LLC worked especially well for me as a single-member independent consultancy. If your organization is more complex (or may become more complex in the future), you should take your firm’s structure into account when choosing the ideal legal entity.
If you are planning to form an LLC for your multi-member boutique consulting firm, consider the fact that the LLC may cease to exist if one of the partners leaves the entity. Additionally, LLCs generally do not specify roles, such as directors and managers. Make sure you spend some time discussing management structure with your partners.
2. Expenses and Fees
Apart from taxes, be prepared to incur ongoing expenses with a more formal business entity. You will have to pay applicable state filing fees, ongoing franchise tax fees, and/or reporting fees, depending on your state and business entity.
Form an LLC for Your Consulting Business
I was surprised to discover that forming my own LLC was much less time-consuming and less expensive than I expected. While it turned out to be a smart financial decision for me, my LLC has also played a critical role in establishing strong client relationships.
The best way to get started is to check your state requirements. An easy way I found to access this information is through Incorporate.com. With Catalant’s partnership with Incorporate, you have access to Incorporate’s professionals who can clearly articulate the nuances of alternative business entity structures for your situation. You can check out Incorporate’s page for Catalant experts here, where you’ll also receive a discount for any incorporation packages.
As you grow your business on Catalant, it is important to be thoughtful about the legal entity under which you operate. Choosing the best legal structure for your independent consultancy should be a personal decision that takes your unique circumstances into account.