Should An Independent Contractor Form An LLC?

An attractive young businesswoman having coffee while working at her office desk
An attractive young businesswoman having coffee while working at her office desk

Independent, or 1099, contractors run their own businesses. A properly classified independent contractor is allowed to set their own hours, decide from where to work, and are allowed to negotiate payment. When you work as a 1099 contractor, you have to think of the businesses who you do work for as your clients, rather than your employer. And as a small business owner, an independent contractor should treat his or her work like any other entrepreneur would, and that includes considering the formation of a separate business entity. So should 1099 contractors form an LLC? That all depends on their personal situation, but there are some great benefits to it.

Fewer Misclassification Concerns

The state has cracked down heavily on 1099 misclassification after years of erroneous assumptions as to what employers could and couldn't expect from an independent contractor. Employers had been using the 1099 designator to keep employees from earning the wages and having the protections required by law. Those corrupt employers also used 1099 to avoid paying their share of FICA tax. Thankfully the government is taking this issue seriously, and those people are being caught and fined, but that has made other companies wary of using 1099 labor. The onus is on the independent contractor to put their clients at ease, and forming an LLC is a good way to do that because it clearly shows you're running a business, rather than just working for another company.

Doesn't Overly-Complicate Taxes

Unless told otherwise, the IRS treats LLCs as sole proprietorships or general partnerships for tax purposes. That means anything the LLC earns flows through it, directly to its owner(s). There's thus no need to worry about double taxation or corporate income tax. When you file your returns, you simply attach a Schedule C, like you would if you were a sole-proprietorship, to report any profits or loss. Depending on how much you earn, you may also have to send in quarterly estimated payments -- it's a good idea to speak to a professional or use an accounting service to help you understand your obligations.

Limits Liability

It normally doesn't take that much initial capital to get an independent contracting business up and running, but turning your business into an LLC does limit your liability for any ensuing suits or disputes. Effectively, forming an LLC turns your business into its own, separate entity. That way it's liable for its own debts and obligations. You have a duty to see those obligations fulfilled, but forming an LLC sort of puts your personal assets into a little protective bubble, so they normally won't be seized to pay for the company's debt.

1099 contractors need to treat their service as a business; otherwise they, or their clients, could get into trouble. And a great way to prove you're contracting work is a business is by forming an LLC. In addition to that, your taxes won't become much more complicated and you'll enjoy the limited liability of any other LLC or corporation.