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Business structures aren’t just for entrepreneurs who sell food, clothes, electronic devices, and other tangible goods. Whether you’re a consultant or a coach, you can start a sole proprietorship, LLC, or corporation.
Your chosen legal structure affects everything from your daily operations to long-term growth. Among the entities that consultants and coaches can establish, an LLC stands as one of the best options. Read on to know why you should start an LLC and when to choose a different business structure instead.
Key Takeaways
- An LLC for consultants and coaches operates as a separate legal entity that protects you and your assets from legal liabilities.
- LLCs use pass-through taxation and can change their tax classification. These entities can be taxed as sole proprietors, partnerships, or corporations.
- The other benefits of LLCs include increased credibility and access to business bank accounts and business credit. However, these entities require ongoing (and costly) maintenance and compliance.
- LLC owners also pay self-employment taxes on their net earnings, increasing their tax burden.
- Before forming an LLC, you must consider these advantages and disadvantages. Trusted experts can help you make the right decision for your venture.
The Basics of LLCs for Consultants & Coaches
An LLC or limited liability company gives you the benefits of corporations and partnerships. It addresses many of the concerns you might have about conducting business while making your operations simple and flexible.
Unlike sole proprietorships, LLCs separate you and your assets from business-related liabilities. This protection works best when you face potential professional liability claims. Plus, you can choose how an LLC will be taxed to reduce your taxable income. (We’ll discuss both in the next section.)
What are the Advantages of Forming LLCs?
Consultants and coaches who form LLCs can get the following benefits.
Liability & Asset Protection
Liability and asset protection are considered the main benefits of forming an LLC for consultants.
If a client sues you for alleged professional errors or breach of contract, an LLC reduces your legal liability. Moreover, the structure protects your assets, including personal property and investments, from creditor seizure.
Related Resource: Learn what happens if an LLC gets sued from NCH.
Increased Credibility
Operating as an LLC instead of a sole proprietorship can also make you more credible. After all, potential clients usually consider LLCs established and trustworthy. Ultimately, you can secure higher-value contracts and maintain strong relationships with your clients.
Flexible Taxation
As we’ve mentioned, consulting and coaching business LLCs can choose how they’ll be taxed. Generally:
- Single-member LLCs are treated as part of their owner’s personal income tax return. (They’re called “disregarded entities.”)
- Domestic LLCs with at least two members are taxed as partnerships.
However, any of these classifications can be changed to a different one. If your income grows to a considerable amount, you can elect S corporation status to reduce self-employment taxes. It’s advisable to make the switch once your net annual income reaches around $40,000 to $80,000.
With an LLC taxed as an S corporation, you can save on taxes by paying yourself a reasonable salary. Any dividends distributed to the LLC’s other members are exempt from self-employment taxes.
Finally, LLCs use pass-through taxation, meaning their profits and losses are reported on your personal income tax return. It helps LLCs avoid double taxation that’s imposed on corporations.
Related Resources
For more details about LLC tax elections, check out the Wealthy & Wise video linked below.
Alternatively, you can read NCH’s guide to choosing between an LLC and a S corporation for a small business.
Business Bank Accounts & Credit-Building
Last but not least, LLCs can open business bank accounts and obtain corporate lines of credit. Both can keep business funds separate from personal finances, making business expenses easier to manage.
Also, separated funds can help your LLC build good business credit. It’s especially important if you want to secure financing for essential equipment, get working capital loans, and negotiate better payment terms with vendors.
What are the Disadvantages of Forming LLCs?
Forming LLCs for consultants and coaches has its disadvantages as well.
Formation & Maintenance Costs
LLC formation involves initial costs, including state filing fees, registered agent services, and potential attorney fees. If you start an LLC in Nevada, expect to spend $425 on initial filings. Ongoing annual fees and registered agent costs add to this fee.
Additionally, proper LLC maintenance requires professional bookkeeping and tax preparation services. Both can increase your annual business expenses to a more considerable amount.
Ongoing Compliance
LLCs must adhere to their home state’s compliance requirements. Otherwise, they risk losing their good standing. We’ve listed some basic compliance requirements for LLCs in the table below.
Requirement | Frequency | Average Cost |
Filing annual reports | Yearly | Varies by state |
Maintaining a registered agent | Ongoing | $100 to $300 per year |
Renewing business licenses Start your Nevada LLC in You don’t need to live in Nevada to enjoy the best asset protection | Varies by jurisdiction | Varies by state |
These ongoing requirements increase your administrative burden and costs.
Self-Employment Tax
If you’re a consultant or coach with a single-member LLC, you’re subject to self-employment tax on your net earnings. This increases your tax burden, unless you elect S corporation status. However, the switch comes with some drawbacks.
- You can pay yourself a reasonable salary, but it’s subject to payroll taxes.
- All salaries given to the members of LLCs taxed as S corporations go through bookkeeping.
When to Form a Consulting or Coaching LLC
Forming a consulting or coaching LLC makes sense if you earn a profit or need to protect yourself from legal liability. Conversely, you can start and maintain a sole proprietorship if you’re operating a low-profit and low-risk venture.
To know the differences between LLCs and sole proprietorships, read NCH’s comparison here.
Does Location Matter for LLC Formation?
Location matters for LLC formation, as each state in the U.S. offers various advantages to aspiring LLC owners.
Let’s take Nevada as an example. Consulting and coaching LLCs formed in the Silver State pay no income and franchise taxes, plus the privacy of their owners are protected. Nevada enforces strong asset protection laws as well, with creditors resorting to charging orders to settle personal debts. This legal remedy directs the LLC to pay a creditor any distributions made to an indebted member.
If you serve clients in multiple states, you must check LLC formation requirements in each jurisdiction. LLCs that want to conduct business in a state other than its original jurisdiction must register as a foreign LLC.
Frequently Asked Questions
Do I need an LLC if I already have professional liability insurance?
Yes, you may need an LLC if you already have professional liability insurance.
Forming an LLC separates you and your assets from business liability. Meanwhile, professional liability insurance protects you from legal claims of professional mistakes. This type of insurance is called errors and omissions (E&O) insurance.
How does forming an LLC impact my taxes as a consultant or coach?
An LLC uses pass-through taxation. Simply put, the entity’s profits and losses are reported on your personal tax return. This helps you avoid double taxation.
When paying taxes, you must report an LLC’s income and losses on Schedule C of IRS Form 1040. Plus, you must pay self-employment tax on your net earnings.
Can a consulting or coaching LLC hire employees?
Yes, a consulting or coaching LLC can hire employees. This way, the business can achieve long-term growth. You just need to comply with requirements such as payroll tax payments and avoiding harassment or discrimination against employees.
Are there any state-specific advantages of forming LLCs?
Yes, there are state-specific advantages of forming LLCs.
For instance, Nevada doesn’t impose income and franchise taxes on LLCs. It also keeps information about LLC owners confidential to protect them from harassment, unwanted scrutiny, or trivial lawsuits.
NCH’s Compare Your State tool helps you weigh the benefits of LLC formation in Nevada and other states.
How does an LLC affect my consulting contracts?
An LLC makes you appear more credible to clients. As a result, they feel more comfortable entering contracts with your business.
If you’ve formed an LLC, you’ll need to update existing contracts to add the entity’s name. This shows that your LLC will handle all payments and responsibilities instead of you.
How much does LLC maintenance cost?
The cost of LLC maintenance varies depending on your home state and other fees.
For example, maintaining a Nevada LLC costs $350 annually. This cost includes the $150 filing fee for annual reports and the $200 fee for state business license renewal. Additional costs may include registered agent services, professional bookkeeping, and tax preparation.
Can I convert a sole proprietorship to an LLC?
Yes, you can convert a sole proprietorship to an LLC. Here’s how to do it:
- Choose a unique name for the LLC.
- Hire a registered agent.
- File Articles of Organization with your state.
- Write an operating agreement.
- Open a business bank account.
- Get an Employer Identification Number (EIN).
- Obtain required business licenses and permits.
Will forming an LLC affect my existing client contracts?
Yes, forming an LLC will affect your existing client contracts. You must update these documents to declare that future payments must be made to the LLC.
Also, most clients update a contracting party’s information, and some may request a new contract. Check your existing contracts for clauses that might affect the transition.
Do single-member LLCs protect you from business liabilities?
Yes, single-member LLCs protect you from business liabilities. Separating personal and business finances and complying with all legal requirements will help you maintain an LLC’s liability protection.
When should I elect S corporation status for a consulting or coaching LLC?
You should elect S corporation status for a consulting or coaching LLC if its net annual income reaches around $40,000 to $80,000. The election can help you save on self-employment taxes, but it requires you to run payroll and conduct more complicated bookkeeping.
Expert Tips From NCH
- If you form an LLC and you’re at risk of facing lawsuits, get professional liability insurance. Both can protect your consulting or coaching business from legal claims of professional mistakes.
- Start as a sole proprietorship if you’re earning a low profit. In most cases, self-employment taxes outweigh the benefits of LLC formation.
- After forming an LLC, make sure you’re adhering to ongoing compliance requirements. Most states require LLCs to file annual reports, maintain a registered agent, pay state taxes, and meet other applicable requirements.
Choose the Best Option for Your Consulting Business
An LLC for consultants offers several benefits, including limited liability protection and pass-through taxation. However, forming one comes with increasing costs, ongoing compliance, and self-employment taxes. To determine whether LLC formation is right for your consulting or coaching work, you must consider these factors and seek expert advice.
With over 30 years of experience in business formation, NCH can help you choose the best structure for your consulting or coaching business.
DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.