Key Takeaways

  • An independent contractor is a type of business structure (a person providing services). In contrast, an LLC is a formal legal entity that could have one or more members. 

  • Unlike an LLC, where you might need to file documents formally with the state, an independent contractor can usually operate as a sole proprietor and get started fairly easily.

  • Besides offering flexibility in managing the business, LLCs can also offer liability protection to their owners so that their personal assets (like homes and cars) are unaffected by business-related debts or claims. 

  • Independent contractors usually receive a 1099 instead of a W-2 because they are not employees and must account for self-employment taxes independently.

  • Creating an LLC allows contractors to present themselves as more professional, especially to larger clients or entities that want to work with a registered business.

  • Consulting a lawyer can help contractors choose the right business structure, navigate complicated tax and legal issues, and ensure they comply with the law.

  • Post a job on UpCounsel to find a lawyer in your state. 

 

Independent contractor vs. LLC refers to the differences between an independent contractor and a limited liability company. Both are business types, but an independent contractor comprises one person or member, while an LLC can have one or more members.
 

Here, we’ll discuss other differences between an independent contractor and an LLC, tax considerations, the benefits of being an independent contractor, and more. 


 

What Is the Difference Between an Independent Contractor and an LLC?

 

The biggest difference between an LLC and an independent contractor is that LLCs are required to register with the state and form business documents, including articles of organization
 

LLCs also offer liability protection that independent contractors would not have otherwise. Business owners must pay a filing fee to the state where they register their LLC, while an independent contractor owes no fees.
 

Independent contractors provide work and services for others but are not technically employees. 
 

Independent contractors are usually creative or technical professionals specializing in a particular medium, such as web design, writing, or information technology.
 

Employees get W-2 tax forms each year that specify their yearly earnings and taxes withheld from their paychecks. Because independent contractors are not employees, they do not receive W-2 forms but 1099-MISC forms instead. 
 

A 1099 (as it's called for short) is a tax form that lists the total income paid to the contractor from a particular company for the year. If a contractor does work for multiple companies or individuals, they'll receive multiple 1099s.
 

W-2 forms show the various payroll taxes withheld from an employee's pay, but an independent contractor doesn't pay those taxes. A 1099 will not show any tax deductions because independent contractors are responsible for paying their own taxes at the end of each year. 
 

They'll be required to pay self-employment tax (like Medicare and Social Security) and personal income tax. Independent contractors should keep close track of their annual earnings and tax percentages so they aren't surprised by what they owe.
 

Most independent contractors choose to form a sole proprietorship for their work, but they can technically choose other types like:
 

Their choice will depend on their long-term goals for the services they offer and how many other people they want to be involved in their business. Most choose to form sole proprietorships because they're the simplest business type to form in most states.


 

Is an LLC an Independent Contractor?

 

An LLC isn’t inherently an independent contractor. However, an independent contractor can form an LLC to gain additional liability protection and other professional benefits. 
 

An independent contractor provides a service on a contract basis, not as an employee. However, an independent contractor who forms an LLC can gain benefits over a sole proprietorship (the default structure for a business without an organizing document).


 

Key Benefits of Being an Independent Contractor

Independent contractor status can be liberating with ease of setup and freedom from bureaucracy. This appeals especially to freelancers and solo professionals, who are typically not required to register their businesses formally.

Easy Setup

With little or no paperwork, independent contractors can be up and running in days. They have complete discretion over business decisions and usually do not need to comply with the many administrative obligations associated with more formal corporate structures.

Simplified Tax Reporting

Similarly, tax reporting is relatively simple. Contractors are generally required to report business income and expenses only in their tax returns (using, for instance, the standard Schedule C).

 

 

Benefits of Forming an LLC

Many other independent contractors also form an LLC to help differentiate between personal and business obligations. 

While the owner of a sole proprietorship is personally liable for business debts, an LLC owner’s assets are protected from business liabilities. 

An independent contractor with several clients can minimize the risk of personal financial responsibility for a business claim or debt.

Professional Image and Potential Tax Advantages

While LLC profits flow through to a personal tax return, LLC owners can sometimes elect corporate taxation, which provides an advantage for some income levels depending on expenses. 

Working under that LLC name can make you look more professional, appealing to larger entities or clients who want to see you under an established business name.

Working as an independent contractor, whether running a sole proprietorship or an LLC, allows for flexibility, simplicity, potential legal and tax advantages, and the freedom to independently take care of basic business needs.


 

What Is a Contractor LLC and Why Should You Consider It?

 

An LLC independent contractor is a non-employee working for a limited liability company. 
 

These contractors receive a 1099 tax form instead of a W-2 form. 

An independent contractor’s schedule is autonomous; the contractor can negotiate the payment price, and the company is considered a client. 
 

Because contractors often see themselves as business owners, they might want to create an LLC to receive personal liability protection and separate their personal assets and business liabilities.
 

An independent contractor can file as an LLC, a partnership, or a corporation under their sole proprietor status. 
 

A sole proprietor operates under their name, reports income on a Schedule C attached to the personal tax return, and has no separation between personal and business liabilities. 
 

Forming an LLC allows a contractor to enjoy the benefits of personal asset protection and the limitation of liability, as business debts remain separate.
 

Whereas ‘independent contractor’ is a tax classification, ‘LLC’ and ‘sole proprietorship’ are business entities. A sole proprietor is an individual who owns an unincorporated business without any distinction between the business and its owner. 
 

Unlike a sole proprietor, an LLC provides a degree of separation between the owner and the entity. Hence, contractors often prefer the LLC to protect themselves in the event of business-related liabilities.


 

1099 Contractor vs LLC: What’s the Tax Difference?

 

LLCs must pay employer taxes if they have any employees, but independent contractors must only keep track of their self-employment taxes. 
 

When it comes to taxation, LLCs are between sole proprietorships and corporations. 
 

A corporation is responsible for taxes as a company, and its shareholders also pay taxes on their shares. This is called double taxation. Sole proprietorships only pay taxes on their individual business income because they have no employees.
 

An LLC will be taxed differently if it has only one member than multiple. Single-member LLCs are taxed like sole proprietorships, but multi-member LLCs are taxed more like partnerships.


 

When Should Independent Contractors Form an LLC?

 

Independent contractors might create an LLC when their business gets large enough, carries more legal risk, or has clients who want to pay an ‘established business’. 
 

The factors to consider are:
 

  • Business Growth: If your business is expanding and bringing in multiple clients or large amounts of income, an LLC can help you formalize your operations and provide a structure for further growth.

  • Liability Risk: Contractors in high-risk fields (e.g., consulting, design, or services involving physical assets) can benefit from the liability protection an LLC affords, protecting personal assets from a suit or judgment against the business.

  • Client Preferences: Larger clients or organizations might prefer to do business with a contractor operating as an LLC—it gives a sense of professionalism and stability.


 

How to Form an LLC as an Independent Contractor

 

If you’re forming an LLC, here are the simple steps you need to take to get your new business entity in order and stay in good standing:
 

Step 1: Choose a Business Name

Decide on a name for your business that complies with the naming requirements listed in your state. It also needs to be a business name that accurately describes the purpose of your business. Most importantly, it can’t be the name of another LLC registered in your state.
 

Step 2: File Articles of Organization

File your articles of organization with your state’s business filing office. This is one of the documents you file with your state government to create your LLC. Your articles typically list your business name, address, and the names of the LLC’s members.
 

Step 3: Create an Operating Agreement

Although not always required, an operating agreement outlines the ownership structure and roles of LLC members. 
 

Including operational rules and guidelines is important for multi-member LLCs, but even single-member LLCs can benefit from doing so to avoid future disputes.
 

Step 4: Get an EIN (Employer Identification Number)

Request an EIN from the IRS website. This will allow you to open business bank accounts, hire employees if needed, and simplify tax filings by reporting on all businesses and employees. 
 

You must have an EIN for your own business identity and reporting needs.
 

Step 5: Comply with State-Specific Requirements

There are differences between how LLCs register in different states. 
 

Some states may require a local license or filing of an annual report—review state-specific regulations to make sure you are compliant.
 

Step 6: Get Legal Advice

Speak to a lawyer to explore more complex tax options or state-specific LLC requirements. An LLC formation lawyer can help you establish an LLC that shields you from too much liability.


 

Conclusion

If you need help understanding independent contractors versus LLCs, post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5% of lawyers on its site. 
 

Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.


 

FAQs

Can I work on 1099 without LLC?

Yes, you can work on a 1099 basis without forming an LLC. Many independent contractors operate as sole proprietors, receiving 1099 forms for tax purposes without an LLC. However, forming an LLC may offer liability protection and additional tax options.

 

Should 1099 be issued to LLC or individual?

If the contractor has an LLC, the 1099 should usually be issued in the LLC's name (especially if payments are made to the LLC’s business bank account). 
 

However, always ask the contractor if they prefer it under their LLC or individual name to ensure you report the taxes properly. 

 

Can you 1099 someone you paid cash?

Yes, if you paid an independent contractor cash for services of $600 or more in a year, you must send them a 1099-NEC, whether you paid them in cash or otherwise. 

 

Can I 1099 myself from my LLC?

Technically, yes, you can 1099 yourself out of your LLC. This is like treating yourself as an independent contractor and paying yourself for your work for the business. 
 

Small business owners who want to 1099 themselves out of their LLC can choose between taking 1099 payments, distributions of profit, or employee wages. The IRS requires the LLC to pay ‘reasonable compensation.’ 
 

If freelancers operating as an LLC choose to take 1099 payments, they will be taxed like other freelancers, which is on their net profit.
 

To 1099 yourself, you must be a single-member LLC (or sometimes a multi-member LLC), report your income and expenses on a Schedule C, and pay self-employment tax on your earnings.