A company may pay employees and independent contractors alike for labor, but an independent contractor is self-employed and not subject to the control or supervision of a company that hires them. Independent contractors may agree to work for multiple people or companies if it does not breach any contracts with other clients. They typically agree to specific terms, and work for a certain fee, delivering agreed upon results according to their own resources or procedures. However, independent contractors, also known as 1099 employees, have more vulnerabilities and liabilities than an employee. Because of this, many 1099 contractors look for ways to add a layer of liability protection and mitigate risks involved with being an independent contractor.
It’s important to note that the term “independent contractor” is not a type of business entity. We’ve discussed different entity types and ownership structures in a previous blogs which can be found here “Picking Your Entity Type” and “Different Ownership Structures for Businesses.” Sole proprietor is a common business entity structure independent contractors start with; they pay self-employment taxes and may not separate business finances from personal finances. While sole proprietorships have some similarities to a Limited Liability Company (LLC), they lack the liability and asset protection of LLCs. Starting an LLC as an independent contractor is a popular way to help reduce personal liability. In Nevada, an LLC is recognized as having separate assets from a person, unlike a sole proprietorship. Therefore, in the event of any legal trouble as an independent contractor, only the assets owned by your LLC are at risk, while those of its owner or members are protected. However, the LLC doesn’t fully cover all liability, you can still face repercussions as an individual. You remain personally responsible for your own wrongdoing which can include professional malpractice, negligence, or fraud.
Another popular reason for forming an LLC as an independent contractor involves tax benefits. As an LLC, you may benefit from a different tax structure. Sole proprietors are subject to Social Security and Medicare tax on all profits earned from their business while LLCs can elect to, as an S Corp, pass through profits which is paid to the owner as a shareholder and not as an employee. You will still have to pay yourself as an employee of the LLC, not taking any employee wages is not allowed, but it can be substantially less than being taxed on all profits of the business. It’s also important to keep in mind that the IRS expects owner-employees to pay themselves realistic employee salaries. Failing to do so could land you an audit and require you to pay additional taxes. Here is our previous video blog on tax structures “Choosing Your Tax Structure”. If you are unsure about your tax situation, it is best to consult with your business attorney and tax professionals.
One of the biggest downsides of being an independent contractor with an LLC is the additional paperwork you will have to process each year for your business. However, the tradeoff of additional liability and asset protection may be worth it in the end. If you are an independent contractor considering starting an LLC in Nevada, we recommend contacting an experienced Nevada business lawyer to help you get started. They will be able to navigate the best structure for your business and file any licensing applications or amendments needed to get your LLC in compliance.