The term “independent contractor” defines how you earn income and your relationship with the people or companies you work for. It is not any particular type of business structure, as independent contractors are free to choose the structure that best suits them, and many choose an LLC.
LLCs are one of the most popular business structures for small businesses, including independent contractors, and offer benefits that can be significant.
✅ Some advantages of LLCs
– Asset protection: One of the most important is that it protects the assets of the business owner. By registering the business as an LLC, the direct connection between the business and the individual is severed, as the business becomes a separate entity, and personal finances are usually not exposed to lawsuits or other liabilities.
– Tax Flexibility: The IRS allows a choice of how the business will be taxed. The simplest option for independent contractor taxes is the default classification, although as an LLC, you can opt to be taxed as an S Corp in order to save some money on self-employment taxes.
– Professional Image: Forming an LLC can help instill confidence for the independent contractor seeking a professional image to their work. There is no need to take half-measures when the LLC is the perfect vehicle to enhance the image and provide a layer of protection against frivolous lawsuits and bankruptcy.
🛑 Some disadvantages for independent contractors
– Time and money: Forming an LLC is not free and, depending on the state in which you incorporate, you may have to pay a significant filing fee. In addition, the actual registration process can take anywhere from 24 hours to a few days or even weeks before all the paperwork is finalized (also depends on the state).
– Annual maintenance: Almost all states require annual reports that serve to verify if any information has changed, or even if the business is still in operation. Often it’s enough to fill out forms, pay fees and you’re done, and depending on the state, prices range from $10 to $100, with exceptions like Tennessee and Massachusetts which charge $300 and $500 respectively, or California, where it’s $800 in additional LLC taxes and fees each year.
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📝 In conclusion
Independent contractors are not required to form a state-level business entity, such as an LLC, but it offers good advantages: they are inexpensive to form, don’t require much maintenance, protect assets, and offer potential tax savings.
✅ If you are an independent contractor and are thinking of starting an LLC, Wave Tax can advise you on how to do it, and maximize your tax efficiency and that of your company.
📩 Contact us at info@wavetax.us