Why do Independent Contractors Need An LLC?

Business Law Tips & Advice

Attorney Nate Gilbert

Independent contractors in Texas must be separate from the business that hired them to do the work, which necessarily means they must be their own company. This will also prevent any kind of personal liability with an LLC.

Texas worker classifications are done on a 20 point basis that was developed from Common Law by the Texas Workforce Commission.  This 20 point analysis goes over the variables that may determine if someone is either an independent contractor or an actual employee.  One of the more prevalent concerns that comes up in this analysis is the separation of the independent contractor’s business from that of their employer, and how freely and independently the contractor is allowed to operate.

Click Here to Download the TWC Independent Contractor Analysis Form

Employees in Texas do not have their own business that employers pay their salary to. Employees are hired by the company, must perform work according to company guidelines, use the tools and equipment provided by the company, and are part and parcel to the company itself.  For independent contractors, the exact opposite must be true: the business of the independent contractor must be entirely separate from that of the employer, and an LLC is one of the simplest means to this end. This avoids personal asset liability in LLC Management.

Creating a separate business as an independent contractor allows you to fully identify and separate your business from that of your employer. Which is the major difference between an LLC VS Partnership agreement in Texas. As an independent contractor, you cannot be made to only work for one employer or work full time for that employer—You are a separate business with independence! Having a business structure such as an LLC reinforces this idea and puts employers on notice that you will not be subject to the same oversight that they may be used to in dealing with employees.

For example, freelance writers often find themselves being hired by companies to perform multiple assignments over a period of time, such as articles and blogs for a local business looking to increase their online presence.  It is easy for employers to blur lines between the duties and responsibilities of employees versus those contractors hired to perform certain tasks when there is no “business” that they are dealing with and instead an individual person or even sole proprietorship.  Using an LLC, the freelance writer can clearly define the boundaries between them and the employer.

The #1 Benefit of an LLC for Independent Contractors: Liability Protection

When operating as a sole proprietor or freelancer, your personal assets are vulnerable if legal issues arise. If your business gets sued or faces claims, your bank accounts, property, and possessions could be seized to pay off debts and judgments.

Forming an LLC creates a legal shield around your personal assets. With an LLC, your business and personal finances are separate legal entities. This means if your LLC is sued or faces liability, your personal assets like your house, car, retirement savings, etc. are protected.

Creditors and legal claims can only go after your LLC’s assets, not your personal belongings. This gives independent contractors immense protection and peace of mind. However, this protection only applies if your LLC is both set up and managed correctly and consistently. Consulting an attorney when forming your LLC ensures your personal assets remain safe no matter what happens with your contracting business.

An LLC will also help to define the relationship between yourself and whomever has contracted with you to perform any work.  As an LLC, you are more clearly placed in the role of Independent Contractor as opposed to that of Employee.

The bottom line is an LLC provides a liability firewall to safeguard your personal assets and finances. For independent contractors, this protection alone makes an LLC worth forming.

Crafting an Operating Agreement for Your Independent Contractor LLC

To formally create your LLC, you should draft and adopt an operating agreement. This document outlines the LLC’s financial and management structure including:

  • Ownership percentages for multiple members
  • Profit/loss distributions
  • Member voting rights
  • Process for adding or removing members
  • Succession plan for departing members

Even single-member LLCs need an agreement to define management authority, transaction approvals, and succession plans.

LLCs offer flexibility – they can be member-managed with equal participation or appoint dedicated managers. Defining these terms clearly avoids disputes. Hiring an attorney to draft your operating agreement is highly recommended.

As your LLC evolves, periodically review your agreement. With a solid operating agreement in place from the start, you can keep your LLC management organized as an independent contractor.

Frequently Asked Questions

What are the main benefits of an LLC for independent contractors?

  • The top benefits of forming an LLC are liability protection, employment status, tax advantages, and credibility. The LLC structure shields your personal assets from any business lawsuits or claims. LLCs allow you to take tax deductions and choose how you are taxed. LLCs also help distinguish between Independent Contractors and Employees. Having an official registered business also adds legitimacy and professionalism for working with clients.

Does forming an LLC protect my personal assets?

  • Yes, a huge advantage of an LLC is limiting your personal liability and protecting your personal assets if legal issues arise. LLCs create separation between your business and personal finances. If the LLC faces a lawsuit or claim, your personal bank accounts, home, cars, etc. are protected.

What are the tax benefits of an LLC?

  • LLCs allow you to take tax deductions for business expenses. As an LLC, you can choose between being taxed as an S-corp or C-corp. This flexibility allows you to minimize taxes depending on your tax situation and income level.

Is it difficult to form an LLC?

  • Forming an LLC is a relatively straightforward process that can be done yourself. The steps include choosing a business name, registering with your state, creating an operating agreement, obtaining licenses/permits, and more. Many states let you form an LLC online in a few hours. Legal and tax help is recommended to ensure it is set up properly.

What are the ongoing requirements for maintaining an LLC?

  • To keep your LLC active, you must comply with annual reporting requirements and pay renewal fees in your state. Texas does not charge any annual fees for your LLC, but you must file your Franchise Tax Report, even if you do not owe any Franchise Tax. You will also need to file separate tax returns for the LLC. Keeping careful records and holding member/manager meetings are also advised.

If you are an independent contractor and need an LLC for your business, Attorney Nathaniel Gilbert in San Antonio offers packages tailor fit to your needs, no matter how great or small, from the “Quick LLC” for full time business management strategies.  For a free consultation, reach out to Nate here, or to learn more about Texas LLCs and business law, Click Here.

Nathaniel Gilbert

Nathaniel Gilbert is the sole attorney at The Law Office of Nathaniel Gilbert, PLLC. Practicing in the areas of Business Law, Nate assist clients with LLC formation and drafting contracts in the states of Texas, Colorado, and Kansas. He can be reached at 726-999-0087.