Should I Start an LLC for My Mystery Shopper Business?

Starting a limited liability company (LLC) for your mystery shopper business 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 mystery shopper business, lawsuits can arise from things like misrepresentation, breach of contract, and trademark infringement.

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

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

Do I Need an LLC for a Mystery Shopper Business?

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 Mystery Shopper Business

By starting an LLC for your mystery shopper business, 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.

Mystery shopper businesses will benefit from liability protection because of the risk of liability from wrongful acts such as defamation, trademark infringement, and breach of confidentiality.

Example 1: Your mystery shopper business faces a lawsuit from a client who claims a refund of payment for services you rendered because your report was incomplete. You believe the incomplete report is covered by a clause in your contract. Nonetheless, if successful, the client can only be reimbursed from business assets. Your personal assets would be safe from the judgment.

Example 2: Your mystery shopper business misses several installments on a vehicle loan, and the bank takes you to court. If judgment goes against you, the bank might garner your business bank account, but your personal assets, including your personal bank account, would be protected.

Example 3: You decide to close your mystery shopper business to go into business consulting. However, at this point, business assets are not enough to pay off all creditors. Nonetheless, creditors will not be able to go after your personal assets, which are protected by the limited liability shield of the company.

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 Mystery Shopper Business

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 mystery shopper business 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

Mystery shopper businesses 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.

A mystery shopper business needs general liability insurance to protect against a variety of risks, including bodily injury, damage to property, and personal injury, such as defamation.

Common Situations Business Insurance May Cover for a Mystery Shopper Business

Example 1: During a visit to a client’s store, you accidentally knock a shelf over and it falls on top of someone. The injured person learns you’re a mystery shopper and decides to sue you. General liability insurance would pay for your legal defense and any required settlement.

Example 2: You write a blog about mystery shopping to give guidance to others interested in the business. In a recent post, you criticize several jobs offered by local companies. One of the businesses you criticize sues you for libel. While you don’t believe the lawsuit has merit, you know you need an attorney right away. General liability insurance would pay for your legal defense.

Example 3: The owner of another mystery shopper business sues you for damages, claiming you stole her company logo. While you don’t see much similarity between the two logos, you know you need to hire a lawyer. General liability insurance would cover your legal defense costs.

Other Types of Coverage Mystery Shopper Businesses 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 mystery shopper businesses should obtain.

Commercial Auto Insurance

Since you will be driving your business vehicle on public roadways, you are mandated by the state to carry a commercial auto policy. Auto insurance protects not only your vehicle but any liability you may have in an accident. Your personal car insurance will not cover you if you are driving the business vehicle, even if you are off duty.

Commercial Property Insurance

If you own your location instead of renting, you need commercial property insurance to protect the building. If your business is based out of your home, your homeowners' insurance will not cover the home when it is being used for commercial purposes. Property insurance also covers items owned by your business.

Mystery shopper businesses invest heavily in the equipment that is used to complete their work. Be sure that you have enough coverage to replace all of your tools in the case of a loss. This coverage is generally offered in a Business Owner Policy (BOP).

In addition to the policies outlined above, there are a few other types of coverage your mystery shopper business may require depending on certain aspects of your operations. Some of these might not apply to you, so be sure to ask your agent which policies are right for your business.

Workers' Compensation Insurance

If your mystery shopper business has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees in the case that they get injured on the job.

Read more about workers’ compensation insurance.

Business Interruption Insurance

In the event of a fire, flood, or other catastrophes, there is a good chance your business operations will be halted for some time. Business interruption coverage is designed to help you recoup a portion of the revenue your business would lose due to the inability to operate.

This type of insurance is typically included in a business owner’s policy.

Commercial Umbrella Insurance

Umbrella coverage allows you to extend above and beyond the standard limits of your other business insurance policies. If you are faced with a large lawsuit or other claim situation, there’s a possibility that the coverage limits of your standard policies will be insufficient. In this case, your umbrella policy will allow you to surpass these limits.

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.

Read our Mystery Shopper Business Insurance article for more info.

A mystery shopper business can be started with next to nothing in capital because you may already have the equipment, a car and a mobile phone, that’s required for operation. Ongoing costs, as you scale, are salaries, vehicle maintenance, business development, and commercial insurance.

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

The ongoing expenses of running a mystery shopper business include insurance, association membership, and general running costs like transportation.

Learn more about running a mystery shopper business.

A mystery shopper business makes money by charging businesses a fee for assessing their business operations.

Learn more about starting a mystery shopper business.

Mystery shopping businesses help other businesses to measure service quality, performance, and customer experience.

The financial rewards for mystery shopping are low to start with but can increase over time as the business builds its reputation and proves its reliability.

Learn more about starting a mystery shopper business.