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Do I need to incorporate, create an LLC for a consulting business?

Morrisville, PA |

Like a lot of folks, I'm "in between" jobs. I have some offers for consulting work and believe that might be my niche for the near term. Do I need to create a corporation or LLC? My work would mostly be web content, marketing and business strategy and I suspect that, unless this explodes into a full-time, long-term thing, all my clients would be in Pa.

Attorney Answers 6

  1. I would strongly recommend that you create an S corporation or an LLC for three reasons. (I favor S corps for some tax savings, but at this point it may not matter much). First, it does provide liability for personal assets should any client become unhappy. Second, it helps to clearly establish you as an independent contractor with your clients. Finally, by setting up your business you may be able to take advantage of some desirable plans for saving money, plans superior to the garden variety 401(k). The cost of setting up the LLC is modest particularly when measured against the benefits.

  2. I agree with Mr. Sprang regarding the benefits. It is not required, however, to have a legal structure, and if applicable, insurance often provides some of the protection that a legal entity would. You might do business under your own name or a "fictitious business name" (dba).

    You might also get some feedback from your CPA.

    The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also terms and conditions item 9, incorporated as if it was reprinted here.

  3. Do you need to create a business entity? Strictly speaking, no. It is entirely possible to do business without one.

    Would it be a good idea to create a business entity? Quite possibly. Depends on a variety of factors too detailed to go into here. You should sit down with a local attorney to assess your situation and figure out which entity, if any, would be right for you.

    This answer does not constitute legal advice and does not establish an attorney-client relationship.

  4. It is probably a good idea to create an LLC to protect yourself from any potential future liability. In PA, filing fees for creating an LLC are relatively cheap ($125) compared to other states so it is probably worth it. I would recommend a simple single member LLC and then considering yourself a "disregarded entity" for tax purposes.

    Additionally, I assume that you will be doing your programming/marketing in PA so you should form your LLC here. The location of your clients will likely be irrelevant, unless the client's state requires you to pay taxes or they would like your services "on site" and out of Pennsylvania.

    Lastly, albeit a little off topic, you should consider hiring an experienced contract attorney to draft and/or review your consulting agreements. In particular, clearly layout any proprietary information, code licensing and IP rights/ownership with the web content that you are creating.

  5. In line with what other attorneys have written, it is not a necessity.

    That being said, in order to properly guide you, it is imperative to know, more precisely, the type of consulting you endeavor to do. With pass-through taxation for sub S and LLC, the real benefit comes from protecting your private assets. Thus, we need to know more specific details of your activity in the industry in order to properly analyze your liability exposure.

    That analysis will look at the type of activity, location of provision of services and so on. In other words, will you be on clients' premises? Will they be on your premises? Will you be accessing their servers? Directly uploading code to their site?

    It may seem over-complicated, but with an extensive background in IT law I've seen businesses shut down- for weeks- by accidental malicious code. Even if not a direct result of your actions, it's possible that someone comes after you for the losses.

    Which brings up the issue of insurance, and so on.

    The information provided herein does not establish an attorney-client relationship. The information provided is based on the limited information submitted by the asker and is, therefore, not intended to provided firm guidance or a solution. The attorney-client relationship is only established upon the signing of a fee agreement with our firm.

  6. My colleagues all offer sound advice at different levels, however, the question to you is that although yo nsee this as a temporary measure to make some money until you get a new job, what you do not appreciate is what happens if you "screw up" and cause damage to a client. If you get sued then your personal assets are at risk unless you (i) have insurance in place to cover your mistake, or (ii) you have a legal entity like a corporation or LLC as the consultant that can be the shield that stops anyone from reaching your personal assets. If you are like so many will want to avoid the costs to buy insurance and the cost to set up a company......ergo you expose yourself to personal liability. My point is that you should not be cavalier about this as the risks are real and the consequences significant if you approach it like most people do ignoring the risks and rolling the dice.

    My answer is not intended to be giving legal advice and this topic can be a complex area where the advice of a licensed attorney in your State should be obtained. Please click "helpful" or "best answer" if my answer added any value or add a "comment" if you have more info for me to help you get a better answer.

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