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Starting a Consulting Business and have a Few Questions

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wolves2002

Heisman
    • I am starting a little consulting work. I have a few questions if someone here has done a similar thing.

    1. Legal structure - is an LLC valuable or is a sole proprietorship sufficient?

    2. My intent is to shelter as much income from taxes as possible. The vehicle that looks the best, so far, is a single participant 401K. It looks like I could make a max contribution and then my business could make a contribution as my employer. Has anyone done something like this?
     
    wolves2002 said:
    I am starting a little consulting work. I have a few questions if someone here has done a similar thing.

    1. Legal structure - is an LLC valuable or is a sole proprietorship sufficient?

    2. My intent is to shelter as much income from taxes as possible. The vehicle that looks the best, so far, is a single participant 401K. It looks like I could make a max contribution and then my business could make a contribution as my employer. Has anyone done something like this?
    Click to expand...

    I'll precede this by noting that these are not necessarily simple questions to answer and this should not be considered tax advice.....

    From a tax perspective, an SMLLC and sole prop are treated identically. The IRS views an SMLLC as a "disregarded entity" and if you form one, you would continue to report your income/expenses on a Schedule C, the same way you would as a sole prop. The LLC can offer liability protection in theory, but it becomes even more important to keep all personal/business income, expenses, assets, and liabilities segregated in order to preserve the existence of the entity for liability purposes. The liability protection of an LLC can be ignored if there is intermingling of business/personal funds.

    One advantage of the SMLLC is that it will allow you to make an S-corp election in the future should that option make sense. If this is straight-up consulting work with no employees and all income is generated by you as an individual, the S-corp likely will not make sense.

    In general, your understanding is correct. You can defer up to the annual limit (18.5k or 24.5k depending on your age). As well, the company make A contribution of up to 25% of your self-employment earnings. You can read more here:

    https://www.irs.gov/retirement-plans/one-participant-401k-plans
     
    Upvote 0
    The major reason to go LLC vs sole proprietorship is liability protection. LLC=Limited Liability Company
    An LLC creates a liability wall against your personal wealth and property... sole proprietorship does not...
    An LLC can only be liable up to the value of the LLC and what it owns

    Question 2 is for your CPA... If you're going to start a consulting practice, your CPA becomes a valuable partner.

    FWIW The liability wall does not protect personal goods against fraud and/or criminality
     
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