Should I Set Up an LLC for My Consulting Business or Use an S-Corp?

In the United States, it is recommended you set up your consulting business as an LLC due to the numerous benefits it offers to business owners.

Considering the risks that come with running a consulting business, you will most definitely benefit from the limited liability protection an LLC provides its owners. Nevertheless, before making this decision, there are essential factors you should take into account.

These factors will include things like tax implications, administrative requirements, as well as the overall structure of the consulting business.

Top Reasons to Set Up an LLC for Your Consulting Business

1. Limited Liability Protection

Considering the risks that come with running a consulting business and offering professional advice and services to clients, this business structure remains a top choice. This business structure works to limit your liability, especially in terms of business debts as well as legal obligations.

This simply entails that if your consulting firm gets to deal with a lawsuit or any form of financial difficulties, your assets, including your properties and savings will be protected from creditors. This is one of the most obvious reasons you should consider forming an LLC for your consulting business.

2. Tax Advantages

Keep in mind that by default, LLCs are taxed as pass-through entities. This simply entails that all profits and losses “pass through” to the owners’ tax returns. This works to eliminate double taxation which is most often found in corporations.

Aside from that, LLC owners also have the opportunity to deduct business expenses, including things like office supplies, travel expenses, and costs associated with professional development, and this could mean better tax savings.

3. Business Credibility and Professionalism

In the United States, forming your consulting business as an LLC also boosts the credibility and professional outlook of your business.

Most individuals, clients, partners, and vendors tend to view LLCs as being more coordinated and grounded entities especially when put in comparison with business structures like sole proprietorships or partnerships.

Note that setting up your business as an “LLC” proves that you are serious about your business and are willing to carry out business activities in a structured and professional manner.

4. Operational Flexibility

Numerous operational flexibilities come with setting up your consulting business as an LLC. This business structure offers you the platform to structure your consulting firm in a way that falls in line with your aspirations and concepts.

When compared to other business structures like corporations known to feature very strict management and reporting requirements, LLCs tend to possess lesser formalities and are easier to manage.

It also offers you the leeway to decide how you intend to manage your LLC, whether via member-managed or manager-managed structures.

Aside from that, these flexibilities also give you the freedom to decide your business decision-making processes, profit distribution, as well as numerous business operations.

Is It Better to Use an S-Corp for a Consulting Business?

There is no straightforward answer to this as the decision will have to be dependent on some vital business factors. Deciding to form your consulting business as an LLC or an S-Corporation (S-Corp) will depend on things like your financial goals, tax considerations, and operational preferences.

Nevertheless, below is well detailed comparison between an LLC and an S-Corp to ensure you make the right decision for your consulting venture:

1. Taxation and Self-Employment Taxes

This remains one of the primary differences between both business structures. For instance, an LLC is known to be taxed as a pass-through entity by default. This simply means that profits and losses pass through to the owners’ tax returns.

It also entails that owners of a consulting business set up as an LLC will have to pay self-employment taxes (Social Security and Medicare) on all business income.

However, although the S-Corp is also known to utilize pass-through taxation, it comes with a certain level of tax advantages.

Under this business structure, shareholders who also serve as employees of the consulting firm will be able to receive a substantial salary, which is subject to payroll taxes.

2. Ownership and Management Structure

Certain levels of flexibility come with setting up your consulting business as an LLC, especially in terms of ownership and management.

Note that your consulting firm set up as an LLC can have a single owner (member-managed) or multiple owners (multi-member LLC).

Aside from that, management can also be taken care of by the owners (member-managed) or designated managers (manager-managed).

However, when it comes to a consulting firm set up as an S-Corp, you will have to contend with a more structured ownership and management setup. Keep in mind that your consulting firm will need to have shareholders, a board of directors, as well as officers.

In this sort of business setup, shareholders are tasked with choosing directors who take care of or handle major business decisions, whereas officers deal with the everyday operations of the consulting firm.

3. Liability Protection and Formalities

Truth be told, both business structures offer limited liability protection that will favor your consulting business in this modern age. This limited liability protection entails that your personal assets are protected from business debts and liabilities.

However, you will most likely appreciate the fact that an LLC comes with fewer formalities and administrative requirements when compared to S-Corps, and this makes them much more convenient to manage and operate.

S-Corps, meanwhile, are known to feature a whole lot of necessities and formalities, some of which include holding regular shareholder meetings, keeping minutes of meetings, as well as maintaining corporate records.

Even though all these formalities boost the corporate structure and governance of your consulting firm, keep in mind that they also come with additional administrative responsibilities and costs.

4. Credibility and Perception

Forming your consulting business as an LLC also boosts the credibility and professional outlook of your business. This particular business structure has proven to be ideal not just for a consulting firm but for businesses of all sizes across various industries.

However, although a consulting firm set up as an S-Corp can project a higher level of credibility and stability in some instances owing to their formal corporate structure, they are not suitable for businesses of all sizes.

As such, you must take into account the size of your consulting firm to be sure that an S-Corp remains ideal and not overly ambiguous for the business.

Steps to File an LLC for a Consulting Business

1. Select a Suitable Name

You will have to start by choosing a suitable and unique name for your consulting business. While the regulations that concern choosing your business name will vary depending on your location, note that you will be expected to include “LLC,” “Limited Liability Company,” or an abbreviation in the business name.

Be sure to take your time to come up with a catchy name that buttresses the sort of consulting services you will be offering.

Also, search through your state’s business entity database to be sure that the name you choose for your consulting business is available and not being used by another business.

2. Appoint a Registered Agent

LLCs in the United States are expected to appoint a registered agent, also referred to as a statutory agent or resident agent in most places.

Note that this person will be tasked with receiving legal documents, and official notices, as well as every other correspondence on behalf of the LLC.

You will need to ensure that the registered agent possesses a physical address within the state or city where the LLC is formed and is available all through regular business hours. Keep in mind that it is possible to be your own LLC’s registered agent.

You can also decide to give the responsibility to a trusted individual within your company, or you can choose to hire a professional registered agent service.

3. File Articles of Organization

Once you are done with choosing a good business name and appointing a registered agent, the next step will be to file articles of Organization.

Also referred to as a Certificate of Formation or Certificate of Organization, note that this document is filed with the Secretary of State or the appropriate state agency where you are expected to set up your LLC.

This is the document that officially forms your LLC and will most or less feature the name of the LLC, name and address of its registered agent, business address, management structure (member-managed or manager-managed), as well as the purpose of the LLC (consulting services in this case).

4. Create an Operating Agreement

Although this is not mandatory by law, putting together a comprehensive Operating Agreement is indeed advisable, particularly for those with multiple members or complex management structures.

This Operating Agreement is expected to contain important information regarding the operation and management of your consulting firm, such as its ownership structure, roles and responsibilities of members/managers, decision-making processes, profit distribution, voting rights, as well as every other very important detail.

The essence of this document is to provide clarity and avoid any form of misunderstandings and disputes among LLC members.