Should I Start an LLC for My Temp Agency?

Starting a limited liability company (LLC) for your temp agency 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 temp agency, lawsuits can arise from things like not paying workers for overtime, unfairly discriminating against certain individuals, or putting contractors in an unsafe working environment.

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

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

Do I Need an LLC for a Temp Agency?

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 Temp Agency

By starting an LLC for your temp agency, 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.

Temp agencies will benefit from liability protection because of the risks involved with communicating with staff members who you are looking to place and various businesses, as well as the risk of workplace accidents and other general business risks.

Example 1: An employee at your temp agency fails to pay one of its workers for the hours of overtime they completed one week. As a result, the worker filed a lawsuit against your business to reclaim this unpaid overtime. Limited liability would ensure that your personal assets are not used for paying this plaintiff any damages should the court award them.

Example 2: A worker that used your temp agency to find a job suffered a broken arm after he was placed in an unsafe working environment. As such, he filed a negligence lawsuit against your business in search of compensation for these injuries. In this instance, the court is precluded from using your personal assets to satisfy any business obligation to pay damages.

Example 3: One worker claims that your temp agency has discriminated against them by refusing to offer them available positions when they arise. This prompts her to sue your business for this discrimination. In the ensuing lawsuit, your personal assets are protected against being seized by the court in order to pay any business liabilities.

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 Temp Agency

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 temp agency 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

Temp agencies 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.

If you own a temp agency, owning insurance is a must due to the risks of breaches of contract or negligence. By offsetting the risks associated with running your business with an insurance company, your agency becomes far more financially stable.

Common Situations Business Insurance May Cover for a Temp Agency

Example 1: A potential client is visiting your office to discuss his employment interests. While entering the restroom, he slips and falls, hitting his head on the floor and sustaining a concussion. He demands that your business pays for his medical treatment. Your general liability insurance would likely cover this cost.

Example 2: One of the temporary workers you represent decides to sue your business, claiming that you slandered her when speaking to a potential employer. While you are not sure what she is referring to, you know that you need to hire an attorney to protect your business. The general liability insurance policy you carry would pay for your attorney fees and the cost of a settlement if one was required.

Example 3: One of your employees trips and runs into a visitor, knocking her to the floor and breaking her arm. The injured visitor decides to sue your business. With general liability insurance, your legal fees are covered by your insurer.

Other Types of Coverage Temp Agencies 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 temp agencies should obtain.

Workers’ Compensation Insurance

As an employer, you are most likely required to carry workers’ compensation insurance by your state. The workers’ comp policy you purchase will pay for medical treatment if an employee is injured performing job-related duties. It would also pay for some of their lost wages if they are unable to work while recovering.

Professional Liability Insurance

Professional liability insurance is designed specifically for your business, so it will protect you from mistakes and errors made by you and/or your employees. If someone decides that your professional advice or representation caused them injury and sues your business, your professional liability insurance would pay for your legal defense. It would also pay for a settlement if you needed to settle the case out of court.

Data Breach Insurance

In the digital age, there is always the possibility that your business could become the victim of cybercriminals. Data breach insurance protects you against damages caused by such events. For instance, if your client database was hacked and one or more clients sued you for damages, your data breach insurance policy would pay for your legal costs.

Commercial Umbrella Insurance

The general liability insurance policy you carry for your business will be adequate in most cases. However, there are circumstances where the limits of your general liability insurance could be exceeded—like if you lose a major lawsuit. Once the limits of your general liability insurance are reached, you are left paying the remaining damages. But if you have an umbrella policy, it will kick in when the general liability insurance stops paying.

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 workers' compensation insurance.

Read our Business Insurance for Temp Agencies article for more info.

If you are considering opening a temp agency, you should plan to need around $40,000, depending on the business premises you select and how many employees you will have. That being said, there are certain unavoidable costs that this figure should be dedicated to. Primarily your office rent, the wages of your temp workers, local chamber membership, and advertising.

Visit our How to Start a Temp Agency guide to learn more about the costs of starting and maintaining this business.

In addition to basic office expenses like rent, insurance, and marketing, the biggest ongoing expense for a temp agency will likely be wages for non-permanent placement workers.

Learn more about running a temp agency.

When temp agencies place non-permanent workers with a company, the agency takes an hourly rate from an employer and pays the non-permanent worker from that amount. The agency receives the difference of the amount paid to the temp worker.

Learn more about starting a temp agency.

Sometimes described as “staffing agencies” or “staffing firms,” temp agencies provide options for those looking for temporary hire, direct-hire, or temp-to-full time employment. Some agencies specialize in one of these options, while others provide all three.

Depending on the relative level of sales success and compensation level for its talent pool, staffing agencies have the potential of earning over $100,000 a year.

Learn more about starting a temp agency.