Part-Time Consulting: Do You Need an LLC?

August 15, 2005

You have decided to get away from the numbers, and follow your bliss by going to the Culinary Institute of America to become a pastry chef, but want to do some consulting on the side to finance your transition and pay for your toque and full set of balloon whisks. Or you may do some consulting to accommodate family demands, or as an adjunct to an existing job. If this is your situation, do you need to set up an entity through which to conduct your practice?

If you have a small part-time consulting practice, you may think you need to set up a corporation or limited liability company. This article will discuss some of the factors you should consider in deciding whether you should do so. Anyone who spends more than five to ten hours a week consulting, or who has a partner, should take the plunge and set up an entity. You can consult the articles in the last three issues to learn about some of the issues you need to consider if you do so. But what if you have a client or two? What are the benefits and drawbacks of setting up a business entity?

A future article will discuss the pros and cons of various entities, but for purposes of this article, we'll assume you would set up a limited liability company, or LLC. LLCs give the protection from personal liability of an entity, but are taxed on a pass-through basis like a partnership. The factors we will be discussing, however, generally apply to all types of business entities.

Cost to establish. Setting up an LLC is usually not expensive. In Connecticut, it costs $60. You probably do not need a lawyer if you are setting up a single member LLC.

Continuing Costs. In Connecticut, there is an annual tax of $250 - $300 for most business entities. Annual or biennial reports, along with a $75 annual fee, are also required. Your state probably has similar fees.

Taxes. Setting up an LLC will also bring you to the attention of the state and local taxing authorities. You can expect that the agency that administers any sales tax in your state will contact you shortly after you form the entity. We do not advise dodging sales tax when you know it is due. The issue of sales tax on professional services is frequently a disputed question, though. If you have a good faith argument that your services are not subject to sales tax, it makes sense to avoid even having a discussion of the issue if you can avoid it.

Limitations on Personal Liability. The primary benefit of an LLC over a sole proprietorship is that it shields you from personal liability for the obligations of the entity. This is may not be a benefit to most casual consultants. Liability for professional malpractice in most states is usually personal, even if performed through an entity. Also, if you don't have an office the public visits, or any open accounts with suppliers or service providers, there are unlikely to be other liabilities from which you would need protection. If you lease any office space or equipment, it is highly likely you will be required to give a personal guarantee anyway.

Using a Trade Name. You can use an LLC to operate under a trade name. In most states, however, you can achieve the same thing by establishing a d/b/a. In Connecticut, you can do this by filing a Fictitious Name Certificate with the local land records office. If you have concerns about giving out your social security number out for tax identification purposes, you can get a tax identification number for a d/b/a separate from your personal social security number by filing a Form SS-4 with the IRS.

Creating more paper and complexity by setting up an LLC is not always necessary. Consultants who have a small practice, and intend to keep it that way, may not need to set up any sort of entity. Instead, you can use your time to keep your day job going strong, help your child master long division, or practice at home so you can ace Soufflés 101 at the Culinary Institute.