Should I Start an LLC for My Debt Collection Agency?

Starting a limited liability company (LLC) for your debt collection agency can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a debt collection agency, lawsuits can arise from things like harassment and/or forced entry allegations, as well as if a debt collector gets injured while working.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your debt collection agency seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Debt Collection Agency?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Debt Collection Agency

By starting an LLC for your debt collection agency, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Debt collection agencies will benefit from liability protection because of the risk of liability for harassment claims, physical injuries on the agency’s property, slander, and other personal injury lawsuits.

Example 1: A debtor files a lawsuit against your company, claiming that one of your employees has been harassing them. Since your business is registered as an LLC, you will not need to personally compensate the claimant.

Example 2: After an employee allegedly forces his entry into a debtor's home without their consent, the debtor threatens to file a criminal lawsuit against your agency unless he is compensated. If your business accrues a significant debt as a result of this incident, your personal assets will remain safe as long as your business is registered as an LLC.

Example 3: You decide to acquire a small business loan in order to expand your digital marketing budget. Since the loan was made between your LLC and the lending party, you will not be held personally liable if your business is unable to pay it back in the future.

Example 4: Several people with outstanding debts file a class action lawsuit against your company alleging that you are harassing them unlawfully.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Debt Collection Agency

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a debt collection agency owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Debt collection agencies rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a trusted LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Debt collection LLCs need to purchase business insurance in order to protect their assets (e.g., transportation vehicles, office equipment, etc.). This is because limited liability protects the owners’ personal assets, not the business’s.

Note: The limited liability offered by an LLC structure does not protect owners against wrongful acts that they’ve personally committed.

Common Situations Business Insurance May Cover for a Debt Collection Agency

Example 1: A debtor accuses you of harassment based on your debt collection practices. General liability insurance would cover your legal costs to fight or settle the harassment charge.

Example 2: While visiting your agency, a potential client trips on a purse left in the hallway by one of your employees. General liability insurance would cover the potential client’s medical bills.

Example 3: Your agency accidentally identifies the wrong person as a debtor, and they sue your company for slander against their character. General liability insurance would cover your legal defense costs.

Example 4: Another company sues you for copyright infringement, claiming your agency’s name is similar to its name. General liability insurance would cover your legal expenses to fight or settle the claim.

Other Types of Coverage Debt Collection Agencies Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all debt collection agencies should obtain:

Commercial Property Insurance

If you own the building in which you operate, commercial property insurance helps protect your business-related property from a variety of events, such as theft, vandalism, and extreme weather. It covers the cost of repairing the physical structure as well as repairing or replacing any equipment you store there.

Workers’ Compensation Insurance

Most states require businesses to carry workers’ compensation insurance for their part-time and full-time employees. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover but also any disability or death benefits stemming from a work-related accident.

Professional Liability Insurance

If your business offers debt consulting services as well as collection services, this insurance covers any faulty or negligent advice you may provide. If a client accuses your company of revenue loss based on your consulting services, for example, professional liability insurance would pay your legal fees if that client decides to sue.

Data Breach Insurance

Because your business collects and stores information about your clients and individual debtors, there’s always a chance you could suffer a cyberattack. Data breach insurance covers damages if a hacker steals information about your agency, clients, and target debtors.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, workers’ compensation insurance, professional liability insurance, and commercial property insurance.

Read our Debt Collection Agency Business Insurance article for more info.

In order to start a debt collection agency, you will need:

Office space
Office equipment
Logo, website, and marketing tools
Legal licensure and insurance

When it comes to maintenance, your largest costs will likely be utilities, rent, and potentially transportation.

Visit our How to Start a Debt Collection Agency guide to learn more about the costs of starting and maintaining this business.

Phone, internet, and transportation are generally your main ongoing obligations. You’ll also need to make enough, or have enough in savings, to meet your day-to-day financial demands until your business is able to break even.

Learn more about running a debt collection agency.

You’ll charge your business customers a commission as a percentage of the financial amount you’re able to collect. This will be a smaller percentage for newer and easier-to-collect debts and a higher amount for old, particularly challenging, and previously unsuccessful debt collection.

Learn more about starting a debt collection agency.

In short, a debt collection agency acts as a go-between for clients and customers. They are the ones to contact debtors and figure out a way for them to pay their debts to your clients in a just manner.

The profit margin that a debt collection agency owner can expect depends on a variety of factors, including their success rate for collecting debts and the total amount of debts collected.

Learn more about starting a debt collection agency.