Should I Start an LLC for My Recruiting Business?

By starting an LLC for your recruiting 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.

Recruiting businesses will benefit from liability protection because of the risk of confidentiality breaches, negligence claims, intellectual property infringement, and other general business risks. 

Example 1: A large company hires your business to fill some vacant positions in their technical support department. Six months later, one of the employees recommended by your firm is involved in a data breach issue, causing the company to lose a large portion of its investment. They sue you for neglecting to perform a thorough background check. Should the court find the business guilty, only the business’s assets will be used in providing compensation.

Example 2: A client arrives early for a morning appointment. They use the restroom, slip, and fall. She is injured and has to be hospitalized. If she decides to file a lawsuit, your LLC may be liable to compensate, but your personal assets will be safe from the case.

Example 3: Your firm is hired to handle the recruitment of 10 interns for a fashion magazine. During the interview sessions for your recommended candidates, one of them turns out to be a stalker of one of the magazine’s editors and causes a stir. This disrupts the entire process, and they proceed to sue you for negligence. In the ensuing lawsuit, you would be protected from being held personally liable to pay any damages.

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 Recruiting 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 recruiting 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

Recruiting 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.