LLC or S-Corp for individual consultant?

decibel.places's picture

Realizing that I'm unlikely to get professional legal advice, I was just wondering what choices other consultants have made.

For my current role, I need to incorporate. I am providing Web Development and Drupal consulting under contract.

So far I am planning to create an S-Corp since I would be the sole shareholder/employee.

Also, I plan to incorporate in NJ where I live - I am working for a company in NYC with its corporate HQ in GA.

Any thoughts?

Comments

LLC is fairly simple in

ben.bunk's picture

LLC is fairly simple in Maryland and it can handle multiple partners but it doesn't scale well beyond a few people my partner and I have had no issues with it. Not sure about NJ.

Probably no need to get an

Mark_L6n's picture

Probably no need to get an S-Corp unless you think you might grow to a number of shareholders. You can look at a C-Corp as well, but if it's just yourself, probably an LLC is good unless there's some compelling reason not to. Another item is to look at Delaware (which I haven't, don't know for sure) which supposedly has more privacy. If they can not publish your contact information, it'll prevent tons of salespeople and yellow-pages type of companies/sites calling.

LLC

vuzzbox's picture

Under the same conditions and same state (NJ) I formed a single member LLC. Same protections and tax handling as an S-Corp, but lower administrative requirements. If you're the only member and you have no employees, you can also avoid disability and workman's comp insurance costs. Consult an accountant, of course, but I think anything beyond an LLC is overkill.

LLC

wilsongreg's picture

I'll second the above. Am in NJ and in the same situation also, and have formed an LLC.

clarify a few points

ictaxadvisors's picture

Hi Vuzzbox,

I recognize this is an old post, but I wanted to clarify some points in your post. I am a CPA that specializes in independent contractors. From a legal protection standpoint, an S corp isn't an entity at all.. it is purely a tax entity; i.e., you can sue an LLC or a C corporation, you can't sue an S corporation because it doesn't exist in the law. You can tax either a C corp or an LLC as an S corp by election.

Secondly, from a tax standpoint, there are very significant differences between taxing a single member LLC (SMLLC) and an S corp. a SMLLC is not required to file a separate return. It is simply filed on a schedule C on the Form 1040. However, an S corp files an entirely separate return (Form 1120-S). The S corp is able to avoid taxes that a SMLLC is not able to avoid.

On the bright side, we both totally agree on the fact that you need to form an LLC, but then you need to elect to have it taxed as an S corp for tax purposes. The savings can be significant.

Best wishes,
Brock Andersen, CPA
888-959-2829
brock@ictaxadvisors.com
www.ictaxadvisors.com

LLC

vuzzbox's picture

Under the same conditions and same state (NJ) I formed a single member LLC. Same protections and tax handling as an S-Corp, but lower administrative requirements. If you're the only member and you have no employees, you can also avoid disability and workman's comp insurance costs. Consult an accountant, of course, but I think anything beyond an LLC is overkill.

Also, just to say it, be sure

vuzzbox's picture

Also, just to say it, be sure that you have a good contract that explicitly defines your independent contractor status. And be sure that the contract is between your corp entity and the client's corporate entity. If you are working full time as a contractor for one company, at their location, at their direction, during the times they define, the tax man could decide that you are (or were), in fact, an employee and someone might have to pay back taxes. It happens, more now than ever.

The Freelancers Union has a good contract builder that includes the independent contractor clause: https://www.freelancersunion.org/contract-creator/

Best of luck with your gig!

Actually the situation

hbecker's picture

Actually the situation vuzzbox describes is in the law - not just the taxman, but under the law you would be an employee and need to be treated as such for tax purposes. If you keep your own hours (most of the time), get an assignment and then perform it without supervision, work at home, etc. then your contract will be an important tool. But if "you are working full time as a contractor for one company, at their location, at their direction, during the times they define" then under the tax law you are an employee. That would save you some money (the employer's half of your social security and medicare taxes) and your "client" would have to withhold income tax money and pay it into the trust fund on your behalf.

1099 vs contractor

Kristen Pol's picture

Correct! Your contract doesn't matter to the IRS... you need to make sure you pass their 20 point checklist:

http://www.accountingpartners.com/irschecklist.shtml

Following are the 20-points that have been established:
1. Must the individual take instructions from your management staff regarding when, where, and how work
is to be done?
2. Does the individual receive training from your company?
3. Is the success or continuation of your business somewhat dependent on the type of service provided by
the individual?
4. Must the individual personally perform the contracted services?
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in
the contract?
6. Is there a continuing relationship between your company and the individual?
7. Must the individual work set hours?
8. Is the individual required to work full time at your company?
9. Is the work performed on company premises?
10. Is the individual required to follow a set sequence or routine in the performance of his work?
11. Must the individual give you reports regarding his/her work?
12. Is the individual paid by the hour, week, or month?
13. Do you reimburse the individual for business/travel expenses?
14. Do you supply the individual with needed tools or materials?
15. Have you made a significant investment in facilities used by the individual to perform services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual only perform services for your company?
18. Does the individual limit the availability of his services to the general public?
19. Do you have the right to discharge the individual?
20. May the individual terminate his services at any time?

Similar:

http://www.careerusa.org/resources/articles/100-12g3-w2-or-1099/281-1099...

If you really want to get into the nitty-gritty, here's the IRS's internal training handbook on the subject!

http://www.irs.gov/pub/irs-utl/emporind.pdf

Legal entity

Kristen Pol's picture

I used an LLC as a freelancer and it requires less administration (no meetings with yourself ;). We use an S-Corp for my company now. We thought about C-Corp and it looks like that is good if you have products or want to be bought out. But, this isn't legal advice ;)

thanks everybody

decibel.places's picture

I appreciate the input from everybody - yes, I do have a good contract with a professional staffing company, I'm dealing with straight-up people.

I also know that there is less ongoing paperwork for an LLC.

This is likely to convert to FTE with the end client, at which point I'm not sure if they would want to maintain the C2C status - but it was the only way to get the rate I wanted for now, and I planned to incorporate "someday" so now is as good a time as any.

As always, I'm blown away by the helpfulness of the Drupal community, Drupaliens rock!

It all depends on specific

Slovak's picture

It all depends on specific circumstances - though in general it's better to stay as a contractor for tax purposes. You are able to have many more tax deductions if you work on your own or via LLC, rather than a FTE. However, you need to consider possible benefits the company could offer you if you were an employee.

thanks everybody

decibel.places's picture

I appreciate the input from everybody - yes, I do have a good contract with a professional staffing company, I'm dealing with straight-up people. The staffing company also told me most of their consultants on C2C are using LLC.

I also know that there is less ongoing paperwork for an LLC.

This is likely to convert to FTE with the end client, at which point I'm not sure if they would want to maintain the C2C status - but it was the only way to get the rate I wanted for now, and I planned to incorporate "someday" so now is as good a time as any.

As always, I'm blown away by the helpfulness of the Drupal community, Drupaliens rock!

new response to an old post

ictaxadvisors's picture

Hi decibal.places, et al

I can't help but chime in. If you are an independent contractor there are about 3 factors you want to consider: simplicity, legal protection, and taxes. If, in your role as an independent contractor, you earn over $30,000 annually, it makes sense in 99% of scenarios to form an LLC, which then ELECTS to be treated as an S corp for tax purposes with the IRS.

Yes, doing business as a sole proprietor (no entity) is the simplest, but it leaves you exposed legally and from a tax standpoint. Forming a C corporation provides excellent legal protection, but it has many onerous requirements and is horrible from a tax standpoint. However, forming an LLC with an S-corp election gives you the best of all worlds. It is relatively simple to maintain, provides ample legal protection, and also allows you to shield a portion of your income from self-employment taxes (which can be very substantial).

As an example, if someone is making $75,000 would save over $4,000 every year in taxes by using this strategy. I can get more specific with the examples if anyone is interested.

If anyone wants to learn more about how to do this, please reach out to me at brock@ictaxadvisors.com or 888-959-2829 and I'd be happy to help. I specialize in the taxation of independent contractors and there are a number of unique tax-reduction strategies available to ICs that regular employees don't have access to. I hate to see you pay more in taxes than is necessary. Our website is at www.ictaxadvisors.com

Good luck,
Brock Andersen, CPA

Washington, DC Drupalers

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