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?


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.


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.


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

your state is important

ictaxadvisors's picture

As an FYI for all--

The type of entity and taxation structure you choose is also highly dependent on the state in which you do business. Some states are not very S corp friendly. Also, we frequently get asked questions about whether or spouse should be on the LLC or not. Again, this is highly dependent on the state you're in. We're happy to help anyone that needs additional info.

Best wishes,
Brock Andersen, CPA
888-959-2829 or 480-499-5297

NYC strategy

ictaxadvisors's picture

Above, I mentioned that your state is very important in determining how you structure your business. For example, in general, Tennessee and New Hampshire are unfavorable for S corporations. Historically, NYC has also been unfavorable because it disregards the federal S election. That said, we have received confirmation from NY that if a single-member NY LLC elects federally for the S election, but not for NY state, then it will be taxed as a sole proprietorship for NYC tax purposes. This opens up a whole new realm of opportunities to potentially reduce taxes for businesses in NYC. This avoids the NYC tax on dividends from an S corp. It's definitely worth looking into.

Best wishes,
Brock Andersen, CPA
888-959-2829 or 480-499-5297


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:

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:

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?


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

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 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

Good luck,
Brock Andersen, CPA

Formation and election for tax purporses

hanoverhr's picture

We're attorneys and Drupal programmers. I'd be glad to chat with you about this. Several great points in this thread, but also a couple of real lemons. Be careful here, and improper election can be a real problem.

There are also business requirements that go with forming a corporation or LLC. This includes insurances, licenses, and various bank requirements.

Sean R. Hanover, Esq.

(and no, I won't charge anything to chat with you -- we're all in this together. Glad to help!)

starting a company

Sarahzz's picture

Although, I read company formation guidelines on the web space, but I was not much confident of handling all the legalities on my own, so I considered it better to seek the assistance of professional experts for quick registration of my new business.

CA S Corp?

Mattwitham's picture

Hi Brock,

I saw a few of your posts here and thought I'd ask you a question. I'm a software developer in CA and I'm being offered a corp to corp contract right now. The offer looks very appealing, but with a CA S corp tax, would you still recommend going with an LLC with an S election set up?


CA S Corp?

ictaxadvisors's picture

Hi Matt,

You're asking a very good question. California does impose a 1.5% income tax on S corporation net income, so it's wise to figure it into any tax strategy. In many cases, it still makes sense to do the LLC/Scorp, but I hesitate to give you a simple yes or no answer, because the potential benefits or disadvantages of an LLC/S corp structure depend on a number of factors specific to your situation. I'll ask some questions here, but if you're more comfortable discussing over the phone rather than through this forum, just give me a call at 480-499-5297. We work with clients all over the US, so it's no problem that you're in CA.

Questions relevant to your inquiry:
1. How much do you anticipate earning with this corp to corp arrangement?
2. Do you have a sense for how long the contract will last?
3. Are you currently working as a W2 employee?
4. When would this corp to corp contract start?
5. Other than this corp to corp opportunity, will you have any other sources of income?

There may be other questions that I need to ask, but this is a good start. I look forward to helping you in your decision.

Brock Andersen, CPA
IC Tax Advisors LLC

CA S Corp?

Mattwitham's picture

Hi Brock,

Thank you for the prompt response. Here are the answers to your questions:

  1. I was offered $86/hr and I'm assuming I will be working some overtime.
  2. This contract is initially for 6 months and if I'm a good fit, they will extend it for 12 more months. It may go longer (at least I hope so).
  3. I am, but if I take this corp to corp opportunity, then I will leave my current position.
  4. They want me to start in mid December.
  5. I might. I have a project that is still in early development. It's an app that I'm building with my brother. It started just for fun, but it might become something bigger. We shall see.

Thanks for your help!

Thanks, Matt--using your

ictaxadvisors's picture

Thanks, Matt--using your answers and some high-level assumptions, I can help you calculate the relative benefits of an S corporation vs a sole proprietorship. Please note, my comparison assumes very few deductions, because I don't know your situation well enough. I recommend that you start the LLC/S corp structure effective January 1, 2017.

I am projecting that you will make $175k in annualized revenue thru this corp to corp opportunity. On the federal level, I project that the LLC/Scorp structure would save you approximately $8,200. For CA, due to the franchise tax and unemployment taxes, your total CA taxes would increase by approximately $1,500. So, the net benefit of an S corporation is roughly $6,700 per year ($8,200 - $1,500). This forum doesn't allow me to attached the spreadsheet I'm using to calculate this, but I'd be happy to provide to you if you get me your email address.

Bottom line--you stand to save substantially by doing this corp to corp contract, even with the extra taxes that CA imposes. That said, it is complex to implement this on your own, so feel free to contact me and I'll be happy to walk you through it. I'm a tax nerd, so I actually enjoy this stuff :)

I'll give you a call

Mattwitham's picture

Hi Brock,

Thanks again, I'll give you a call on Monday.


self-employment tax base hike in 2017

ictaxadvisors's picture

As a heads up, the self-employment tax base increased from $118,500 in 2016 to $127,200 in 2017. This makes the tax benefits of an S corporation even more beneficial.

Unemployment benefits?

Suresh_new_world_it's picture

I have a PA LLC, and I read somewhere that if I'm in between contracts I can fire myself and collect unemployment, is it true? I'm in PA and it is very often that I find myself to have 2-3 months without a job, so I was wondering if I can keep on firing and hiring myself as the contracts end/start.

Thank you,

Probably depends

marvs5's picture

It probably depends on how your LLC is set up. Did you make an s-corp election? Are you paying for unemployment insurance? Even if you are eligible, if you use a lot of the benefit, your premiums will likely skyrocket.

lowering premiums?

Mattwitham's picture

I have an S corp, is there anything could be done to bring the premiums down?

No. Officers and

gooney0's picture

No. Officers and shareholders are not eligible for unemployment benefits. You shouldn't be paying premiums for officers and shareholders either.

Also, if you did collect your LLC would still have to pay you a percentage of your salary. Your premiums would then increase.

Independent contractor in Texas

micpizzi11's picture

I am sure this question has been asked and answered but I need to confirm the right path for us. My husband has been an independent contractor for 2 years with the same company. He earns approx. $156k a year. At the end of each year we are slammed with a huge tax bill. Many years ago when we were in a similar situation in CA we had an S corp and paid him through that, which helped with the tax situation. (It is no longer in place). Now he wants to form an LLC. Will this help us with self employment tax if we pay him as en employee from the LLC? Should we set up an LLC with S corp tax filing? Or is an S corp the way to go. I like that the LLC has less paperwork as it was always hard to keep up with all the requirements for the S corp.

You ABSOLUTELY need to be set

alphex's picture

You ABSOLUTELY need to be set up as an LLC / S - Corp.

Additionally, when you break out your accounting in to a business and personal situation it becomes SO much easier to handle the book keeping and accounting.

No matter what, its going to save you money and headache managing things.

As a corporate entity, you can insure the business against any fault. When people hire the business, the business is at fault if they decide to sue you for anything, not you the individual.

Hi. Thanks for the reply. But

micpizzi11's picture

Hi. Thanks for the reply. But is it better to be LLC or S corp in regards to tax savings? Has anyone done the research or have personal experience?

can we move this thread?

Dave Johnson's picture

I don't think this is the appropriate forum for this discussion. Please move it somewhere else. thanks.

Not relevant

micpizzi11's picture

The forum topic is 'LLC or S-Corp for individual consultant?'. How is my post not relevant? I'm confused.

Maybe my mistake

Dave Johnson's picture

Not sure why I am getting these messages. I will check my settings.

you're posting in the right place

ictaxadvisors's picture

Don't worry, your post was perfectly appropriate.

as is usually the case, it depends

ictaxadvisors's picture

There is no tax difference between an LLC with S corp election or a regular S corp. They both result in the same thing. However, there is usually a little bit less paperwork on the legal side of things with an LLC filing the S election. As such, if you're going to go the s election route, I suggest you first form an LLC. Are you still in CA? How much longer does he anticipate doing contract work?

No, we are in TX now. We

micpizzi11's picture

No, we are in TX now. We anticipate continuing as a contractor for quite a while so we will form an LLC starting 1/1/18.
Thank you for your reply!

Well, the move from CA to TX

ictaxadvisors's picture

Well, the move from CA to TX by itself will have a very positive impact on your taxes. Yes, we recommend you form an LLC and then make an election to be taxed as an S corporation. Then, he will need to pay himself a salary as well as maintain bookkeeping, and pay quarterly taxes, and file an annual S corporation tax return.

Thanks in advance!

Chanakya's picture

You guys rock. I am going through a similar situation and kind of overwhelmed with information that's on internet. Please see my scenario below and suggest me if any changes needed.

We live in NJ and i am working as a full time employee. My wife took a maternity break and decided to join back workforce in September. We found a good technology contractor position for her with a Corp-Corp rate of $80/hr and this gig started from Oct 1st. We used a friend's advice and started a LLC on her name. He is a part time CPA as well and registered our company with Illionois state and himself as registered agent.

Question:1 Is it an issue if company location is based out of NJ and registered with a different state.

Question:2 I was following your discussions, at what point should we be electing our LLC to be taxed as S-Corp.

Question:3 We received our payments for the month of October into business account. How can we take money out and how much is allowed on a monthly basis.


1) No big deal. That’s

gooney0's picture

1) No big deal. That’s fairly common. You would need to follow any requirements for that state. (Annual reports, or fees.)

2) I believe a LLC is already “pass-through” taxation anyway. That means the profit or loss goes on the owners’ 1040 tax.

Corporations all begin as C (Business pays tax on profit) and have to “elect” to become a S-corp.  (Owner’s pay tax)

You should double check for a LLC.  You’ll want the profit or loss to pass though to the owners.  If it doesn’t you’ll get more paperwork and more tax.  The business will pay corporate tax, then you’ll pay income tax on the dividend.

I once owned an LLC and the profit passed-through to me.

3) With one owner the money doesn’t actually matter. You aren’t taxed on the money, rather the profit or loss.


    Your company brings in $70,000 in revenue.

    Your business pays your wife $50,000 a year in salary.

    You spend $10,000 on expenses.

    The business makes $10,000 in profit after expenses are paid.  $70 - $50 (salary is an expense) - $10 expenses.

    On your taxes you’d show:

    $50,000 from W2.

    + $10,000 schedule E. (100% of the $10,000 profit)

    You’d then have a Adjusted Gross Income (AGI) of $60,000 

In this example it doesn’t matter where the $10,000 in profit went. You can take it, or leave it in the bank. Either way you’ll pay income tax on the $10,000.

IF you have more than 1 owner that’s different. You’d have to share the $10,000 with the other owners. If you owned 50% you’d be entitled to only $5,000 of the profit.

4) I’d suggest “cash based” accounting. It isn’t as accurate as “accrual based” but it is MUCH easier. Consulting is a simple business. If you’re doing cash based here is how that looks:

January:  Did $100 worth of work but didn’t get paid yet.
February:  Didn’t do any work.  Collected $100 from last month.

With cash based, January was a loss and February was pure profit.  From an accounting perspective this seems wrong and stupid.  It’s simple though.

You simply count the cash.  Same for expenses.  For most items you can treat them as an expense that is now worthless.  You don’t have to depreciate the asset.

This is great if you buy a computer.  For small business you can simply say your $1,000 laptop was a $1,000 expense.  A larger business would have to factor in the current value of the laptop and only take it’s depreciation as an expense.  That is a lot of work.


ictaxadvisors's picture

Hi there, CPA here :) To your questions:

  1. No, this is not a problem. HOWEVER, if your wife is doing the work in NJ, then unfortunately, her LLC needs to register as a foreign LLC in NJ as well. Effectively, you end up with an LLC registered in 2 states and you do not avoid the NJ taxes. If it was legal to simply run the income through another state, everyone would do this. I would not have advised to form the LLC in IL as this does not provide you any benefit.
  2. I suggest you elect S corp status when the net income (after expenses) is projected to be over $50k in a calendar year. Please note, NJ has a separate S election to file from the IRS.
  3. If she's going to keep the LLC without an S election, then she can simply transfer the money to herself. She would need to set aside enough money to cover the taxes. If she elects an S corp status, then her S corp will need to set up payroll. At that point, she'll receive both a salary and be able to take out dividends. There is not "set amount" for what is allowed on a monthly basis, particularly for an LLC without an S election. If she makes an S election, it will be important to ensure that enough of the profits are coming to her as W2 wages to avoid audit.

Good luck!

Thanks for your response!

Chanakya's picture

This is where i am getting confused.

Is it mandatory to run $50000 as salary ? Since she is self employed, should we just pay self employment tax on net income and rest can be drawn into personal account and pay income tax on rest of the net income ?

Sorry for asking really basic questions, I am still trying to understand the basics of how this whole thing work.

For an S-Corp I have to pay

gooney0's picture

For an S-Corp I have to pay myself "A fair and reasonable salary" this should be a salary that i'd earn elsewhere.

For a S corp, you are not self-employed. You earn a salary + profit. That's Schedule E.

An LLC can be taxed either way. Either self-employed or Salary +profit. I'd suggest Salary + profit so you don't may Social security on 100%.

You'll want to pay estimated taxes if you go self-employed tax. The IRS will get upset if you suddenly owe them thousands.

LLC rules are set by the state...

hbecker's picture

So, in effect, the answer is "it depends."

But from a federal tax perspective, if you elect to file as a sole proprietor (single-owner business) you reconcile your business income and expenses on Schedule C that's filed with your 1040. In this case, you don't pay yourself a salary - you pay yourself and consider it "owner's draw." You'll want to draw enough out of your business to pay quarterly estimated taxes to the IRS, and probably also to your state/local tax agency, in addition to what you expect to be profit from your business.

I usually leave most of my money in my interest-bearing business account and only withdraw my "salary" (including enough for taxes) when I need it. That way, if I have a big expense (i.e., for equipment) the money's there and I don't need to put money into the business account from my personal funds to pay for it.

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