Do I Need an LLC for My Business Consulting Firm?

Starting a limited liability company (LLC) for your business consulting firm 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 business consulting firm, lawsuits can arise from things like professional malpractice, as well as from indemnity claims (e.g., a client suing you to recoup losses suffered as a result of your negligence, etc.).

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

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

a business consultant giving advice to a business owner

Should I Start an LLC for a Business Consulting Firm?

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 Business Consulting Firm

By starting an LLC for your business consulting firm, 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.

Business consulting firms will benefit from liability protection because of the risk of professional liability in the form of negligence and malpractice claims. Business consulting firms must also be aware of conflicts of interest and confidentiality, given their access to intimate details of the businesses that they work with.

Example 1: You take a loan from the bank in the name of your business consulting firm which has been set up as an LLC. Business is slow and you are unable to service the loan. Should the bank take legal action, your personal assets will be under no threat. The loan is owed by the LLC, a separate legal person to you.

Example 2: A contractor threatens legal action to recover payment for services performed that were ordered by your business consulting firm LLC. Owing to low cash flow, you have been unable to pay the bill from LLC funds to date. If she does sue, the proper defendant would be the LLC. Your personal assets are protected.

Example 3: You dissolve your business consulting firm LLC because more promising business opportunities have arisen. The LLC has negative equity, however; liabilities exceed assets. Creditors cannot ask you to make up the difference or go after your personal assets to get paid. Limited liability, expressly meant to apply to situations like this, will shield your personal assets.

Example 4: A client relies on your professional expertise to advise them, and they suffer business losses because of your advice. They sue your business based on a negligence claim.

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 Business Consulting Firm

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 business consulting firm 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

Business consulting firms 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 professional 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?

Yes, all businesses need insurance because of operational risks. Business consulting firms will need general liability insurance in the event they are sued for failing to meet contractual obligations, for providing negligent advice, or for other acts or statements that cause a client some business-related harm.

LLCs protect personal assets. Business insurance protects business assets.

Common Situations Business Insurance May Cover for a Business Consulting Firm

Example 1: While visiting your office, a business owner trips on some broken pavement in your parking lot, sprains an ankle, and demands you pay for her medical care. General liability insurance would cover her medical treatment.

Example 2: A competitor files a lawsuit against you, claiming your business libeled her company. General liability insurance would pay for your legal defense and any required settlement.

Example 3: As you complete some work at a client’s place of business, you walk into his recording studio and accidentally knock over some expensive equipment. General liability insurance would cover the cost of replacing your client’s damaged property.

Other Types of Coverage Business Consulting Firms 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 business consulting firms should obtain.

Professional Liability Insurance

While you strive to help your clients achieve the best possible results from their business ventures, there’s always a chance someone might claim your professional services caused them harm. If a client sues your business based on a negligence claim, professional liability insurance would cover your legal fees and any required settlement.

Commercial Auto Insurance

Any vehicle you use primarily for business requires commercial auto insurance to protect the vehicle, driver, and others on the road in the event of an accident. Be sure to select a policy that covers not only accident-related vehicle repair costs and medical treatment for anyone injured, but also sufficient protection for any business materials you carry in your vehicle.

Workers’ Compensation Insurance

If you have any employees, most states will require you to carry workers’ compensation insurance for both part-time and full-time workers. 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.

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. It is also advisable to have professional liability insurance to cover malpractice, errors, or negligence claims.

Read our Business Consulting Firm Business Insurance article for more info.

The costs to start a business consulting firm will chiefly be those related to setting up an office and the purchase of computers and software. Total costs should be $5,000 or less. Operating costs will include office rent, utilities, such as electricity and internet access, and commercial insurance.

Visit our How to Start a Business Consulting Firm guide to learn more about the costs of starting and maintaining this business.

Ongoing expenses for a business consulting firm include utilities, client management software, contract labor fees, marketing and advertising costs, payment support systems, and legal support services.

Learn more about running a business consulting firm.

Business consulting firms can make good money if they secure large corporate clients who can afford higher fees on an ongoing basis. There are also digital business opportunities such as memberships and digital courses that allow business consulting firms to scale up their offers and services.

Learn more about starting a business consulting firm.

The need for business consultants is ongoing. Businesses need consultants to help them overcome their challenges, increase revenue, and grow.

With low overhead and high-profit margins, competent consultants can differentiate themselves and specialize their services to be more profitable. The emergence of digital consulting and the rise of globalization offer more opportunities for business consulting.

The average profit margin for a business consulting firm needs to be no less than 10% to 12% to be sustainable. Some types of consulting, such as strategy work, can bring in higher profit margins between 35% and 60%.

Learn more about running a business consulting firm.