Should I form an LLC as an Independent Contractor?
If you're an independent contractor, you may wonder whether it makes sense to form a limited liability company (LLC) for your business. While there is no one-size-fits-all answer, there are several factors you should take into account before deciding.
- An LLC involves fees and paperwork but will provide you with legal protection if your business is sued.
- An LLC won't change your tax structure if you work independently.
Liability Protection: A key reason people choose to form an LLC is for the liability protection it provides. As an LLC, your personal assets are separate from your business assets, which means that if your business is sued, your personal assets (like your home or car) generally cannot be seized to pay off any debts or judgments. However, if you're an independent contractor and are sued, your personal assets may be at risk.
Business Credibility: Creating an LLC can help signal to clients and customers that you're a serious, professional business. It can also provide a level of credibility and stability that may make clients more willing to work with you.
Filing Fees: One of the main differences between being an LLC and an independent contractor is that LLCs are required to register with the state and pay filing fees. The costs of forming an LLC can vary widely by state, but typically range from a few hundred to several thousand dollars. On the other hand, if you're an independent contractor, you don't need to register with the state or pay any fees.
Paperwork: It's much easier to just start doing business than to form an LLC. If you aren't sure you want to be independent long term you might consider taking the risk of building a little bit of a business before taking the jump.
Tax Structure: As a single-member LLC with no employees, you'll be taxed as a "disregarded entity," which means you'll report your business income and expenses on your personal tax return (Form 1040) using Schedule C. In other words, you'll pay taxes on your individual business income, just like a sole proprietorship. However, if you're a multi-member LLC (meaning you have employees), you'll be taxed differently.
Ultimately, whether to form an LLC as an independent contractor is a personal decision that depends on your business needs, goals, and circumstances. Before making a decision, it's a good idea to consult with a lawyer or tax professional who can help you understand the advantages and disadvantages of forming an LLC.
Each individual and business tax situation is different and unique so WorkMade does not provide specific tax advice, only supplying general information based on information published by various taxing authorities, which may change over time.