LLC in California Benefits and Drawbacks for Private Contractors
Working as a private independent contractor comes with many benefits. However, while being your own boss as a sole proprietor and having more flexibility in your schedule might seem like an advantage, you could be putting yourself and your business at risk. Without an LLC, you can face personal liability for any claims filed against you.
That said, starting an LLC isn’t necessarily right for everyone. There are many good reasons to form an LLC, but there can also be drawbacks. In this article, we will explore the benefits and disadvantages of LLCs in California to help you better understand your options and whether or not an LLC is right for your business.
What Is an LLC?
A Limited Liability Company (LLC) is a business structure or legal entity that blends corporate structures and partnerships. The idea behind this structure is that it separates the business owner or their business from their personal assets.
This separation protects your assets as the business owner, ensuring they remain safe if a claim is filed. An LLC in California also allows your business to operate under more straightforward and flexible tax requirements.
Why Private Contractors Should Consider an LLC
There are numerous advantages to being a private contractor. You get to decide whom you work for and how your work is completed. You aren’t tied to one client and can take on multiple projects simultaneously to boost your profits. You essentially get to operate like a small business, meaning you can be eligible for small business tax write-offs and represent yourself in small claims court.
However, if you work as a self-employed independent contractor without forming an LLC, you put yourself and your business at risk. While you aren’t required to have an LLC in California as a contractor, it can offer you a range of benefits.
Forming an LLC in California Benefits
There are several advantages to forming an LLC versus staying a self-employed independent contractor:
- Asset protection: Unlike independent contractors, if you encounter a lawsuit or other legal issues related to your work, your personal property, savings, and other assets are protected and cannot be used to settle your legal obligations.
- Tax flexibility: When you form an LLC, you get to decide how you are taxed, maximizing your ability to save money. For example, you can be taxed as a C or S corp, saving you money on self-employment taxes.
- Insurance freedom: Your insurance choices as an independent contractor can impact your personal finances, whereas your LLC business insurance will not.
- Flexible management structure: As an LLC, you can decide how your business is run and managed.
- Employee benefits: If you decide to scale your business, you can offer employee benefits as an LLC, such as health insurance and retirement.
- Business credibility: As an LLC, you gain more credibility, as the LLC status looks more professional to potential clients.
Disadvantages of Forming an LLC
While forming an LLC is generally considered a wise move for private contractors, it doesn’t come without challenges.
Forming an LLC in California will require a more intensive administrative workload as there will be more paperwork, reporting, and compliance requirements. There are also additional costs and fees associated with setting up an LLC. In California, the LLC fee will depend on your income. Below is a breakdown of how these fees are assessed:
- $250,000 – $499,999 = $900 fee
- $500,000 – $999,999 = $2,500 fee
- $1,000,000 – $4,999,999 = $6,000
- $5,000,000 or more = $11,790 fee
Maintaining an LLC versus a sole proprietorship will also cost more money over time. So, if you aren’t making much money, the costs of an LLC might outweigh the potential benefits.
Get Legal Assistance Forming an LLC with Radoslovich | Shapiro, PC Attorneys
Forming an LLC can be complex and sometimes overwhelming if you don’t understand the process and all it entails. It can also be a strategic move if you want to grow your business and protect your assets.
At Radoslovich Shapiro, our team takes a collaborative and innovative approach to legal services. We can guide you through forming an LLC in California, helping you navigate any potential challenges and understand the valuable benefits it offers. Our priority is always to meet our clients’ needs by dedicating the utmost care and attention to every transaction.
For more information or to set up a consultation, please contact us online or give us a call at 916-565-8161.
