I have been considering doing some small IT side work mainly around data restoration and recovery and potentially small business consulting. I have a full time IT Job that I do not plan on leaving anytime soon as it pays well and allows me to work from home as needed. The idea for me to do this is more of an experiment of self reliance and also to pay down some bills. With that, I also want to protect myself and family from ‘sue’ happy people. Is it a good idea to start off with an LLC and maybe a DBA or is operating as a Sole Proprietorship enough and I am just over thinking it?
First, if you’re thinking about setting up an LLC, it’s a good idea to speak with a local business attorney. Many lawyers offer free initial consultations, so you can pick their brain without committing to hiring them. I’ve worked as a paralegal myself–and I currently have my own LLC–so I can offer a few tips. But I’m not a licensed attorney, so keep that in mind.
From a tax standpoint, there’s no real difference between an LLC and a sole proprietorship. The IRS “disregards” the LLC for purposes of income tax, so if you’re a one-member LLC that’s considered the same thing as a sole proprietor. You basically just file a Schedule C with your 1040 to report any business-related income and expenses.
In terms of liability, the LLC is a separate entity that can “sue and be sued” in its own name. That protects your personal assets from business creditors. But you need to be careful in separating business and personal accounts. You should have a separate checking account for the LLC. Now, you don’t need a separate tax ID if you have no employees. In other words, if it will just be you doing the consulting with nobody else on the payroll, then you can use your SSN to open the business account.
You should also have an attorney draft an “operating agreement” for the LLC. Even if it’s just you, this creates a paper trail that clearly delineates your personal life from the business. And of course, you’ll need to file appropriate organizational paperwork for the LLC with your state, although in my experience, this isn’t terribly difficult. In most states, you just need to file a written statement containing the name and address of the LLC and the name of the “registered agent” who can accept legal service (which is you).
Thank you for your insight it gives some things to think about. I did not consider the need to find a business attorney for a small startup. I guess it makes sense to make sure that everything is in order from the start. An ounce of prevention is worth a pound of the cure.
@smolivallc pretty much nailed it as far as the LLC goes. I’ll warn you though about something that caught me off guard when I first started consulting on the side. I had to pay $600 for an insurance policy I needed for a $300 job… I did it because I knew I would need it for jobs down the line.