Have you been wondering, “Should an independent contractor form an LLC?” This question is often posed by sole proprietors who work on their own.
If you are concerned about professional liability, forming an LLC can get you “out of hot water” fast.
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When Should an Independent Contractor Form an LLC?
So, when should an independent contractor form an LLC?
If you have a nice house, on which you pay a mortgage and own one or more vehicles, you already have your answer. In this instance, answering the question,
“Should an independent contractor form an LLC?” is easy, as the answer is a definite “Yes.” Not only will an LLC help you separate your personal holdings from your business assets, it will protect you from losing your house and cars.
You can also open up a business bank account when you form an LLC, which makes separating your personal and business holdings even easier.
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In this instance, it pays—literally—to form an LLC, or limited liability company. As the name implies, an LLC limits your business liability to only your business holdings.
Otherwise, you can get sued for your personal assets if you don’t have this type of legal protection.
If you are working as an independent contractor, you normally will work as a sole proprietor or form an entity, such as an LLC. You may be able to skip forming an LLC, for instance, if you live in an apartment and you really are not too concerned about losing your form of transport.
However, with that being said, it never hurts to form an LLC, as it adds to your professional credibility. People who form LLCs not only attract more business, they also enjoy benefits with respect to taxation and liability.
Should an Independent Contractor Form an LLC If They Invest in Real Estate?
When should an independent contractor from and LLC if they enjoy investing in fixer-uppers or flips? The answer is anytime they wish!
In fact, many real estate agents like to work under this entity and often form an LLC for each property they buy and invest. Doing so separates the property from what they own personally and professionally, and therefore makes it easier to protect their other real estate and personal holdings.
When Should an Independent Contractor Form an LLC If they Work as a Dentist?
Dentists, who work as independent contractors. may also ask the questions, “When should an independent contractor form an LLC?” In this case, a dentist can set up a professional liability company, or PLLC.
The biggest drawback of being and independent contractor and forming an LLC is paying self-employment tax. This portion of your earnings, which an employer normally withholds is paid by the independent contractor, whether or not the contractor establishes an LLC.
As of 2021, the current self-employment tax rate is 15.3%, which covers what you must pay for Social Security and Medicare. Therefore, independent contractors must set aside this amount from their earnings and make this payment when they file their tax returns.
Nevertheless, as an LLC, you do enjoy pass-through taxation. Therefore, you do not have to pay taxes on your company’s earnings.
Instead, you only pay taxes on the salary you give yourself on your personal income tax form. Therefore, you can reap big rewards when it comes to filing your own personal taxes.
Should an Independent Contractor Form an LLC if They Write for a Living?
Writers may also ask, “Should an independent contractor form an LLC?” In this case, a writer may choose to form an LLC or remain a sole proprietor.
If the writer does not have large personal holdings, or is satisfied with what they make, or does not wish to expand their business, working as a sole proprietor may be better. For example, some writers, who are semi-retired, who do not own a home any longer, may not feel the need to form an LLC.
Should an Independent Contractor Form an LLC If They Plan to Expand and Grow?
Some independent contractors want to expand and grow, and therefore ask, “Should an independent contractor form an LLC?” In this case, the answer is “Yes.” You will get farther ahead by forming an LLC.
Not only will you be responsible for your own debts and liabilities, you can protect yourself against disputes. Plus, taking this step will simplify your tax payments. For example, you can avoid the double taxation of traditional C corporations.
In turn, you can protect yourself against law suits without having to give up any of your income. Taxes become easier to file, as you only have to report your profit or loss on an IRS Schedule C.
This form is attached to your individual income tax return. The IRS, for tax purposes, considers LLCs the same as sole proprietorships and general partnerships.
*If you wish, you can opt to be taxed as an S Corporation as an LLC owner. If you are worried about paying the high rate for self-employment tax, this election may be a good option.
I can answer any questions along these lines as well. Simply email email@example.com for further details.
What To Do Next
Do you still want to know the answer to the question, “Should an independent contractor form an LLC?” If so, I can help you decide so you can make a clear-cut decision. Don’t leave yourself vulnerable to liability claims.
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