Last Updated: May 10, 2024, 1:32 pm by TRUiC Team

Do I Need an LLC for My Private Investigation Firm?

Starting a limited liability company (LLC) for your private investigation 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 private investigation firm, lawsuits can arise from things like giving clients misleading advice or using a logo that shares too many similarities with a copyrighted image.

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

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

a magnifying glass on a pile of old-fashioned letters

Should I Start an LLC for My Private Investigation 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 Private Investigation Firm

By starting an LLC for your private investigation 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.

Private investigation firms will benefit from liability protection because of the risk of property damage, trademark infringement, data breaches, workplace accidents, and more. 

Example 1: A client sues you, believing that the information you gave them was false, leading to their divorce. Being an LLC, limited liability would protect your personal assets so they could not be taken in the settlement.

Example 2: During a meeting in your office, a client trips over some furniture and suffers a concussion. They sue for the cost of their medical expenses, lost wages, and pain and suffering. Your personal assets would be protected in the lawsuit.

Example 3: The logo you use for your firm has many similarities to a trademarked image. The copyright holders are suing you for copyright infringement. Since your business is an LLC, limited liability protects your personal assets so they could not be used to pay for the damage.

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 Private Investigation 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 private investigation 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

Private investigation 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 loansgrants, and credit.

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

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 limited liability protection from being an LLC protects your personal assets, not your business assets. 

Private investigators may find themselves in their own legal issues if they are not careful for things such as trespassing. Having insurance on your business can help protect your assets if you find your business in court and even help with some legal fees.

Common Situations Business Insurance May Cover for a Private Investigation Firm

Example 1: A potential client is meeting you at your office when she slips and falls on ice outside your entryway and breaks her wrist. Your general liability policy will likely cover the cost of treating her injuries.

Example 2: You are visiting the home of a client to discuss the details of a case. He is cooking in the kitchen as you ask him questions. You accidentally bump into him as he is carrying a pot of boiling water, and the water spills and burns him. He sues you for his injuries. Your general liability policy would pay for your legal defense and for a settlement if one is required.

Example 3: A competing private detective has accused you of speaking badly about him and his business to multiple potential clients and is suing you for slander. Although you are certain that this is untrue, you still need to defend yourself legally. Your general liability policy will pay for your legal defense.

Other Types of Coverage Private Investigation 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 private investigation firms should obtain.

Commercial Auto Insurance

Any automobile you use primarily for business should be covered by commercial auto insurance. Your policy will ensure that you meet the legal requirements of your state. If you are found to be at fault in an accident, it will help pay to repair or replace your vehicle and any other vehicles involved, as well as any related medical expenses.

Professional Liability Insurance

A professional liability insurance policy designed for your private detective business will help shield you against liability related to your work. It will cover negligence claims due to mistakes or failure to perform. If you are sued for either, your policy will cover your legal costs and the cost of a settlement if necessary.

Home-Based Business Insurance

If your business is run out of your home, there is a chance that your homeowner’s policy won’t cover you for accidents resulting from your business activities. A home-based business insurance policy would cover such accidents so you are not left paying for them out of pocket.

Commercial Umbrella Insurance

An umbrella policy will pick up where a general liability policy leaves off. For example, if you were to lose a major lawsuit and the damages you were required to pay exceeded your general liability limits, then the umbrella policy would cover the remaining costs until its limits were reached.

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 and commercial auto insurance.

Read our Private Detective Business Insurance article for more info.

Most private detective businesses effectively start out of the home, meaning that the bulk of the costs of opening the business rests with the equipment. Many can start for under $3,000 which includes:

  • Laptop - $700 or less
  • Video cameras and covert cameras - $350 each
  • Data storage devices - $150 or less each
  • Vehicle tinting - $500 or less

Ongoing costs are minimal, typically just keeping devices up to date and operational.

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

Operating expenses for a private investigation firm are generally quite low. They can include advertising, insurance, and rent if you have an office.

Learn more about running a private investigation firm.

Private investigation firms make money by charging clients, usually hourly, for investigation services.

Learn more about starting a private investigation firm.

People hire private investigators for all sorts of reasons, from personal to professional. One of the upsides of starting a private investigation firm is that it can potentially have very low startup costs. This could help the business start to turn a profit fairly quickly.

The median salary for a private investigator is around $45,000.

Learn more about starting a private investigation firm.

Related Articles

Article Sources

IRS: Limited Liability Company

IRS: S Corporations


SBA: Small Business Guide

SBA: Choose a Business Structure Guide

US Census Bureau: Small Business Statistics

SBA Office of Advocacy: Data on Small Business

FRED: SBA Data for Small Business