Should I Start an LLC for My Human Resources Consulting Firm?

Starting a limited liability company (LLC) for your human resources 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 human resources consulting firm, lawsuits can arise from things like misclassifying employees in order to pay them less than they are rightfully owed and engaging in discriminatory practices.

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

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

An open book with the words - human resources - written on it

Do I Need an LLC for a Human Resources Consulting Firm?

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

You should start 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 Human Resources Consulting Firm

By starting an LLC for your human resources 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.

Human resources consulting firms will benefit from liability protection because of the risk of lawsuits for personal injuries, trademark infringement, and libel, among other things.

Example 1: During a routine audit, your firm is found to have underpaid employees in several areas. Employees file lawsuits against the company for damages and losses incurred as a result of these errors. Having limited liability protection means that you will not be held personally liable for these financial disputes, and your personal assets will remain protected.

Example 2: A disgruntled ex-employee of your human resources consulting firm sues your business for wrongful termination after being laid off. Limited liability protection can help limit the financial costs of this lawsuit, protecting your personal assets from any damages awarded by the court.

Example 3: While conducting a workplace assessment, you discover that the company’s policies and procedures are outdated and do not adhere to current legal standards. Your clients are exposed to potential lawsuits for various forms of mistreatment or misconduct. Having limited liability protection ensures that your personal assets will be protected in the event that your clients’ firm is sued.

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 Human Resources 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 human resources 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

Human resources 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?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Human resources consulting firms need insurance to protect their businesses and employees in case of any claims or litigation. Without insurance, they are liable for any costs associated with employee-related legal issues. Insurance also can provide coverage if a client is unsatisfied with the services provided and takes legal action against the consulting firm.

Common Situations Business Insurance May Cover for a Human Resources Consulting Firm

Example 1: While visiting a client’s office, you spill coffee on a desk, damaging a laptop and other electronic equipment. General liability insurance covers your legal liability to replace or repair damaged items.

Example 2: A local competitor is suing you, stating that your new marketing campaign directly targets them and has cost them a significant amount of business. Your general liability policy will cover your legal costs, as well as any damages awarded in a court of law.

Example 3: While work is being done to your office, a client stops by and trips over some work equipment. He has named both you and the contractor in a lawsuit to cover medical bills and other damages. General liability insurance will pay the cost of your part of the lawsuit.

Other Types of Coverage Human Resources 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 human resources consulting firms should obtain:

Commercial Property Insurance

Commercial property insurance, commonly included as part of a business owner’s policy (BOP), insures business-owned real estate and business property for claims such as fire and weather. You can tailor this policy to meet the specific needs of your business.

Professional Liability Insurance

In this industry, your clients rely on your professional experience and expertise to ensure their business runs smoothly. If they feel you have not met the terms of the service agreement, they could sue you for professional negligence. Even if the claim doesn't have merit, the court could still require you to pay the claimant damages. Professional liability insurance pays related legal expenses and the awarded damages, up to the limits of your policy.

Workers Compensation Insurance

State law mandates that business owners protect their employees, should they become ill or injured while on the job. Workers' compensation covers the cost of related medical bills and a portion of wages lost while the employee is out of work. Additionally, it protects the employer against lawsuits, offering legal representation if an employee sues.

Workers' compensation insurance is typically purchased as a standalone policy.

Data Breach Insurance

Modern companies rely on technology for most aspects of their business. Unfortunately, this also makes these businesses vulnerable to online hackers; an attack excluded by a general liability policy. Data breach insurance, also called cyberattack insurance, fills that insurance gap, covering damages from a data breach that results in stolen user data.

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, professional liability insurance, and commercial property insurance.

Read our Business Insurance article for more info.

Opening a human resource consulting firm can cost between $2,000 and $10,000. This includes the cost of purchasing a computer, office software, a laser printer, a fax machine, and an internet connection. It takes considerable time to build up your client base and start earning an income; many business owners, therefore, choose to start it as a part-time job.

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

Ongoing expenses include office supplies, office equipment depreciation, utility costs, and travel expenses if a business owner meets with clients in person.

Learn more about running a human resources consulting firm.

A human resources consulting firm makes a profit by charging companies for consulting services.

Learn more about starting a human resources consulting firm.

A human resources consulting firm helps companies develop appropriate HR policies and procedures so they don’t run afoul of the law.

Profits depend on how many hours you bill each day and how much you charge per hour. However, generally speaking, this type of business can earn considerable profits.

Learn more about starting a human resources consulting firm.