Key Takeaways:

  • LLC Benefits: Provides liability protection, tax advantages, and a professional business structure for consultants.
  • Steps to Formation: Includes registering with the state, obtaining an EIN, acquiring necessary licenses, and creating a business plan.
  • Challenges: Some states impose additional taxes on LLCs, and investor funding can be more challenging compared to corporations.
  • Industry-Specific Considerations: Licensed professionals may need to form a Professional LLC (PLLC) instead.
  • Alternative Structures: Sole proprietorships and corporations may offer different benefits based on individual needs.

LLC consulting is an advisory service for entrepreneurs who are starting a limited liability company (LLC). This business structure provides personal liability, along with the convenience of pass-through taxation in which profits and losses are reported on the owner's individual tax return. 

An LLC is inexpensive to establish and requires only minimal annual taxes and fees in most states. This business structure also shields the owner or owners from personal liability for debts and legal judgments of the LLC, preventing the seizure of individual assets to pay these obligations. 

The LLC establishes a trade name for the business, though this can also be achieved in some states by filing a Fictitious Name Certificate or DBA ("doing business as").

Starting a Consulting LLC

Consultants help other businesses by providing their expertise, experience, and skills in a specific area, such as:

  • Management
  • Information technology
  • Philanthropy

Consultants assist with strategic planning, business efficiencies, and increasing revenue, along with a host of other areas. If you're considering starting this type of business, ask yourself the following questions to determine if consulting is the right fit:

  • What are my specific skills? How can I differentiate my services from those of other consultants? It's not enough to simply market yourself as an IT consultant. Instead, consider specializing in a niche such as cybersecurity (see our page about cybersecurity and data privacy lawyers).
  • Am I willing and able to market myself? This is essential for any consultant, since you'll need to network, sell your services to clients, and nurture those relationships.
  • Am I a good time manager? Consultants will need to strike the right balance of billable and nonbillable activities to grow their business successfully and make a profit.

If you're already established as an independent consultant, forming an LLC can help take your business to the next level by creating a strong, professional market presence with the benefits of a formal business entity. As an LLC, you'll be able to obtain the trust of potential business and nonprofit clients and more successfully market your consulting services.

Common Challenges of Running a Consulting LLC

Starting a consulting LLC comes with numerous benefits, but there are also challenges to be aware of:

  • Administrative Responsibilities: Unlike sole proprietorships, LLCs require ongoing paperwork such as annual reports, operating agreements, and recordkeeping.
  • State-Specific Fees & Taxes: Some states impose franchise taxes or LLC fees that can increase operational costs.
  • Difficulty in Raising Capital: Investors typically prefer corporations since they can issue stock, making it harder for LLCs to attract funding.
  • Separation of Personal & Business Finances: Maintaining a dedicated business bank account and following corporate formalities is essential to preserve liability protection.

Establishing an LLC

While the guidelines for establishing an LLC vary by state, this is the general process you'll need to follow:

  1. Register your LLC with the secretary of state by filing articles of organization and paying the specified filing fee.
  2. Register with the IRS for an Employer Identification Number (EIN). This can be done by filing Form SS-4 by mail, fax, or online; it does not require a fee.
  3. Check with your local state and municipality to determine whether you need additional business licenses or permits to operate in your area.
  4. Contact Dun and Bradstreet to request a D-U-N-S number, which is a small business commercial credit score. This is often required to do business with government agencies and large corporations.
  5. Create a comprehensive business and marketing plan that outlines your LLC's purpose and mission, projects profits and losses, identifies your target market, and details strategies to reach this audience. You can download a template online from the U.S. Small Business Administration.
  6. Develop a logo and marketing tools, including a bio, brochures, business cards, and other collateral, along with a website and social media accounts.
  7. Access the resources of your local Chamber of Commerce and other networking groups. This will help you build connections and relationships that will prove valuable in your business.
  8. Develop and submit consulting proposals for key potential clients. Furthermore, monitor industry publications for request for proposals to which you can respond. 

Industry-Specific Considerations for Consulting LLCs

Not all consulting businesses are subject to the same rules when forming an LLC. Here are a few key industry-specific considerations:

  • Licensed Professionals: In some states, consultants in fields like law, accounting, and healthcare cannot form a standard LLC. Instead, they may need to establish a Professional Limited Liability Company (PLLC).
  • Government Contracts: If your consulting business intends to work with government agencies, you may need additional certifications, such as a D-U-N-S number or a System for Award Management (SAM) registration.
  • Multi-State Operations: If you provide consulting services across multiple states, you may need to register as a foreign LLC in those jurisdictions.

Advantages of Forming an LLC for Your Consulting Business

If a client sues you as a consultant and you lose, you are at risk of losing personal assets such as your home and vehicle unless you have established an LLC. While limiting your personal liability is the main benefit of forming an LLC, you can also access tax advantages. As a single-member LLC, your profits and losses are considered self-employment income. This can minimize your tax fees. 

You can also opt to be treated as a partnership or a corporation for tax purposes if it is advantageous to do so. For example, taxation as an S corporation allows you to draw a salary while avoiding the double taxation of dividends.

Alternative Business Structures for Consultants

While an LLC is a popular choice for consultants, other business structures may be more suitable depending on your business model:

  • Sole Proprietorship: The simplest structure with no legal separation between the business and owner. While it avoids LLC fees, it provides no liability protection.
  • Corporation (S or C Corp): Best for consultants seeking investor funding, as corporations can issue stock and attract outside investment.
  • Partnership: Ideal for multiple consultants working together, though it does not offer liability protection unless structured as a Limited Liability Partnership (LLP).

Frequently Asked Questions:

  1. What is the main benefit of forming a consulting LLC?
    The biggest advantage is liability protection, which shields personal assets from business debts and lawsuits.
  2. How much does it cost to start a consulting LLC?
    Costs vary by state, typically ranging from $50 to $500 for filing fees, plus any additional state-specific taxes.
  3. Can I form a consulting LLC if I work alone?
    Yes, a single-member LLC is a common structure for solo consultants who want liability protection and tax flexibility.
  4. Do I need an attorney to set up a consulting LLC?
    While not required, consulting an attorney can help ensure compliance with state laws and the best tax structure for your business.
  5. Can a consulting LLC hire employees?
    Yes, an LLC can hire employees, but you’ll need to register for an EIN, comply with state employment laws, and withhold payroll taxes.

If you need help with establishing an LLC for your consulting firm, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to 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.