Updated June 30, 2020:

An LLC independent contractor, or 1099 employee, is someone who completes work for a limited liability company but does not meet the definition of an employee. Independent contractors may want to consider forming their own LLCs to give themselves some added protection.

Independent Contractors for an LLC

Independent contractors can decide where and when they want to work and can negotiate their own payment for the work they perform. Unlike an employee, an independent contractor will treat their employer more as a client rather than an employer.

An independent contractor is, in essence, his own small business, and his work should be treated the same as any other entrepreneur. Therefore, independent contractors should consider forming their company as a separate business entity. Whether or not a 1099 contractor should form his company as an LLC will depend largely on his personal situation, but there are many benefits that come with forming a limited liability company.

Independent Contractors

By definition, any individual who works for a company but not under the capacity and definition of an employee will be considered an independent contractor. Often a contractor will be a technical or creative professional bringing in such skills as design, web expertise, or IT service. These professionals will receive a 1099-MISC at the end of the year instead of a W2 to file the income they earned with your company through the IRS.

An independent contractor can file under business entity types such as:

  • Corporations
  • LLCs
  • Sole proprietor
  • Partnerships

Most contractors will file as a sole proprietor, though. As an independent contractor is not, in fact, a direct employee of the company, his pay will not have any payroll taxes withheld from it. Therefore, independent contractors will have to file and pay these taxes at the end of the year or through estimated quarterly tax payments.

The primary difference that separates an employee from a contractor is the fact that the company is not obligated to withhold and make tax payments based on the money the contractor earned. The contractor is then responsible for all of his own tax payments and well as tax reporting.

Sole Proprietors

An independent contractor is considered a sole proprietor if he is not registered as any type of business entity with the IRS, such as an LLC or partnership. If you do not choose a business entity, you will become a sole proprietorship by default. 

Your business will be classified under sole proprietorship if your business expenses and income are listed separately, and you have not registered your business with the state. While this is the initial classification, you will have the further option to decide which legal structure you will want to provide your services.

Being a sole proprietor will mean that an independent contractor will provide all of his services under his own name, be required to keep track of his business expenses and income, and file a Schedule C with his personal tax return. When making out contracts with companies that will become clients, the company will be doing business directly with you as a contractor and not your business.

Limited Liability Companies (LLC)

Even if you have been operating as an independent contractor, you have the option of form a company through which you can provide your services. One commonly chosen type of business structure is a limited liability corporation or LLC. An LLC will provide the owner with more protection than a sole proprietorship.

By forming an LLC, you will do business under the company name instead of the contractor name. Additionally, by forming an LLC, you will provide some protection of your personal assets and liability against business debts.

Differences: LLC, Sole Proprietorship, and Independent Contractor

The primary difference between independent contractors, LLCs, and sole proprietorships is that the term "independent contractor" is a tax designation, while "sole proprietorship" and "LLC" also refer to the way in which the business is run. Another difference is that a sole proprietorship opens up the owner's personal assets to a business creditor, while an LLC provides some protection.

A person can act as both an independent contractor and sole proprietor and will be required to report business income and expenses on his personal return and file a schedule C.

If you need help understanding the relationship between LLCs and independent contractors, 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.