When you first start your consulting business, it will be an exciting time with a lot of decisions to make. One of the important decisions is what kind of business structure you want to have. You might wonder, "How do I structure a consulting business?" or "Is it better to be a sole proprietor or LLC?"
As a single-owner consulting business, your choices will come down to a sole proprietor or single-member LLC. Even if you decide to go with a sole proprietorship at first, you can choose to form a single-member LLC for your consulting business at any time.
Here, we'll explore the differences between a single-member LLC vs. sole proprietorship so you can make the right call for your business.
What Is a Sole Proprietorship?
In short, a sole proprietorship is a small business that is not a separate legal entity from its owner. If you are doing business by yourself, under your own name, with no formal business structure, you are a sole proprietor and your business is a sole proprietorship.
Any business owned by a single person is considered a sole proprietorship by default unless you file the appropriate paperwork to form an LLC. A sole proprietorship is the simplest form of small business ownership because it's just you and your personal (legal) name, with no separate identity for the business.
A sole proprietorship does not have to register with the state if they are operating under the owner’s name. For example, if you are Jane Smith, your sole proprietorship could be called Jane Smith Consulting without any additional registration steps. However, if you wanted to offer consulting services under the name A+ Consulting, you would need to either form a single-member LLC or file a DBA (doing business as) for your sole proprietorship.
Under a sole proprietorship, all business liabilities are owner liabilities; there is no separation of business, legal or tax liabilities between the owner and the business. There are no complex legal requirements for setting up a sole proprietorship, but this type of business also doesn't offer the same protections that an LLC or other formal business structure can provide.
What Is a Single-Member LLC?
A single-member LLC is exactly what it sounds like: a limited liability company with a single member. In this type of business structure, the company itself is a separate legal entity from the owner (you), who is also the single member.
While similar to a sole proprietorship in the sense that there is a single owner, there are additional protections offered by the single-member LLC that shield you from business liabilities due to the fact that your business is its own entity.
A few benefits of forming an LLC for your consulting business include:
Getting an Employer ID Number (EIN): After forming an LLC, you can get an Employer Identification Number (EIN) for your consulting business. This gives your business its own separate identity for tax purposes and can help you maximize the tax benefits of doing business as an LLC.
Personal liability protections: A limited liability company (LLC) literally limits your legal liability should you ever face a lawsuit or other legal action. By doing business as an LLC, you can protect your personal assets from some of the worst-case scenarios of running a business.
What Are the Benefits of a Single-Member LLC vs. a Sole Proprietorship?
So, is it better to be a sole proprietor or LLC? That depends on which benefits matter most to you.
The primary benefit of a sole proprietorship is always going to be the ease of administration. Since it is not considered its own legal entity, compliance regulations do not come into play; as a sole proprietor, you can just do business under your own name without filing paperwork or maintaining any official records.
However, in almost every other aspect, a single-member LLC is a safer choice for a beginning business owner. While a single-member LLC might have more up-front costs than a sole proprietorship, the protections that come with having your business as a separate entity will likely serve you and your best interests in the long term.
What’s the Best Consulting Business to Start?
The U.S. consulting industry has experienced significant growth in recent years. For example, despite experiencing a minor dip in 2020, the management consulting market has recovered and then some, exceeding $263 billion in 2022.
But no matter what is happening with the overall size of the consulting market, there are lots of ways to build a successful business as a consultant. Many companies need help from independent professionals and are willing to hire consultants on a flexible, project-by-project basis.
Consulting is a broad industry. There are many fields of expertise within it, including:
To build your consulting business, think about your expertise and value proposition. What problems can you help businesses solve? How can you deliver value on a project? You can often build a consulting practice based on your previous industry experience.
Get Your Consulting Business Started
If you choose to hire out as a sole proprietor, you will be contracted under your own name and you will be personally liable for any debts, errors or liabilities that may come about during your work. If there were to be an issue, your personal assets could be at risk if the business you're contracted with decides to sue you.
If you choose to form a single-member LLC, however, your personal assets are protected since your business is considered to be a separate legal entity. If there is a legal problem, it will be your business that is exposed to liability, rather than you personally.
As a result, single-member LLCs are often the best choice for solo consultants. The work you will be doing for other businesses is directly related to you, and an error on your end can be easily traced back to you. Not having your personal assets involved will make doing the work less stressful. But either way, consider buying professional indemnity insurance to protect yourself in case of legal liabilities.
If you are just getting ready to open your doors and you simply aren’t sure where to start, the first thing you need to do is decide what kind of consulting business is going to be the right fit for you. You are going to be starting out as a solo consultant with little overhead, no employees and a dream.
It’s fine to start out under your own name as a sole proprietorship while you build your client base. Once you feel like you need the professionalism and protection of an LLC, Incfile is here to help. Our $0 + state fee LLC filing service can get you started in no time.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.