You are about to open your own consulting firm and you were originally considering launching it as a sole proprietorship.
However, other options come to mind, and you may decide in favor of a limited liability company (LLC). What are the benefits and disadvantages of an LLC?
About the LLC
The limited liability company is the choice of many new business owners because it offers personal asset protection. You report business income and expenses on your personal tax return, just as you would as a sole proprietor. However, creditors can go after all assets belonging to a sole proprietor. If you do business as an LLC and your company goes under, creditors cannot touch your assets.
If, as a new consulting firm, you anticipate losses for the first two years or more, an LLC enables you to pass the losses through not only to yourself but also to any other owners. You do not have to use the accrual accounting method and thus have accounting flexibility. Flexibility also extends to profit sharing and to the management structure of your firm. Also, unlike corporations, there are no rigid meeting or documentation requirements.
The setup and operation of the LLC are a bit more expensive than a sole proprietorship would be. You may also have to pay unemployment compensation for yourself. Remember too, that your LLC must maintain its own records. You will need a separate bank account and keep all personal business separate from your consulting firm business. Your attorney can go over all the benefits and possible pitfalls of an LLC and help you make a decision about the format for your new business.