Is it worth forming a single person LLC for moonlighting and other tips for LLCs?

December 17, 2011 5:20 PM

Is it worth forming a single person LLC for moonlighting and other tips for LLCs?

I am considering doing some moonlighting work and have been reading up about forming an LLC. My main interest in using an LLC structure is liability protection as I may be doing some technical/engineering design work.

I get very different takes on the usefulness of an LLC for a single person from different books. Some books indicate that courts tend to disregard single person LLCs liability protection and treat them as sole proprietorships.

Is an LLC useful in terms of suits regarding professional liability for technical design/engineering work?

Is filing quarterly estimated taxes necessary if no-income is earned during that period.

Is it worth the hassle of forming the LLC in a state you do not reside in for tax purposes?

Any other tips or thoughts regarding LLCs for moonlighting work?

posted by cycleback to law & government (15 answers total)

Hi, my day job is forming LLCs. And the answer to your question is talk to a CPA. Every state has very different rules regarding the taxation and location of your LLC (this is why you probably hear a lot about people making LLCs in Delaware, for instance.)

Especially considering this is an engineering LLC and will probably require some sort of proof of certification in the state you're in, you want a professional to handle this.
posted by griphus at 5:31 PM on December 17, 2011 [2 favorites]

The best answer for liability protection is liability insurance, not an LLC.

What many people do not recognize is that using an LLC or incorporating will not protect you from personal liability for your own acts. Rather, it is designed to protect you from personal liability for the acts of other employees of the business.
posted by yclipse at 5:59 PM on December 17, 2011 [2 favorites]

Unfortunately, I am not sure that I will be doing enough work to justify the financial expense of liability insurance.
posted by cycleback at 6:12 PM on December 17, 2011

I am a lawyer, but I am not your lawyer and this is not legal advice.

Depending on your work, liability insurance can be pretty cheap. I had a client who refused to form an LLC because the annual liability insurance premium for a million dollars of coverage for his business activities was less than the annual business entity tax (around $250).

An LLC is not a magic shield; if it's undercapitalized (which can include lacking liability insurance) courts can sometimes disregard it and go after the principal's assets anyway.

The only real, definitive answer you are going to get to this question is going to be, talk to a lawyer and an accountant in your state.

One thing I've been seeing lately is that some law firms will do an LLC for free. This is a pretty clever loss leader since in most states it is a simple 1 to 3 page form, but if you can find one that will do a free consultation about forming an LLC, that might be the way to go.
posted by gauche at 6:22 PM on December 17, 2011

I'm keeping an eye on the answers here too as I was just about to post nearly the exact same question. A few things I have found out:

-- I wanted to set up the structure more to be "official" in a way, to have a name and entity that could possibly expand, be shared, sold, etc. I am doing creative work, but liability protection will probably not be a huge issue (it hasn't come up in two years of doing the same type of work that I would be doing under the header of the LLC). However, the one thing holding me back has been the publication requirement in NYC. What I thought would just be a set of paperwork has a dirty little secret -- you must publish a notice of incorporation for an LLC in two local papers -- those endless tiny print things you always flip past in the paper. You can't pick your papers, the clerk does. And it can add up to about $1500. It is a total f'ing scam, if you ask me. Why can't I choose the papers? Who reads these? What is the point (beside revenue for newspapers). Anyway, you may want to factor that in if you don't know how much money you will be generating over the course of the first year.

-- I spoke to a CPA that recommended ignoring that. I'm not sure that is the best advice. The same CPA suggested I also look for a different state to set up shop -- but after some research it looks like you would also need to set up the LLC in NY anyway if you conduct business here. Your state may be different.
posted by This_Will_Be_Good at 6:41 PM on December 17, 2011

General liability insurance is relatively cheap, but errors and omissions insurance is not. I'm usually quoted about $1200 and more for one year of coverage. This is the insurance that covers you if you make a mistake in a design, give "bad" advice, etc.

I am not a lawyer, yada yada, but I am self-employed and have been required to buy both liability and E&O insurance by some big clients. They require this even though I'm an LLC.

To me, the advantages of an LLC are professionalism and an easier "in" with clients, who appear to face less paperwork when doing business with another business than they do when working with individuals, but that might just be my clients.

For more info on incorporation and taxes, I recommend the publications by Nolo Press. They're available online.
posted by ceiba at 8:35 PM on December 17, 2011

I have read several of the Nolo Press books but I feel they skim over some of the liability and tax issues. They also don't really cover single person LLCs.
posted by cycleback at 9:39 PM on December 17, 2011

You can save yourself a lot of grief and expense if you avoid forming an LLC unless absolutely necessary.
posted by JackFlash at 2:12 AM on December 18, 2011

While JackFlash is almost never to be listened to when it comes to all things legal... he's probably right here. Your question reflects a basic misunderstanding about the way business entity liability shields actually work.

An LLC probably won't shield you from liability for the kinds of things you're talking about. Say you're working for your employer and you cause a car accident. The doctrine of respondeat superior means that your employer is liable for the wreck too, but that doesn't change the fact that you were driving the car and are thus absolutely on the hook in your personal capacity. Your employer may decide to indemnify you for that liability--most employers do--but that doesn't change your personal exposure. Similarly, anything you do as an engineer/technical consultant that could get you in trouble would automatically subject you to liability in your personal capacity, because it's something that you, personally, did. The fact that you did it as part of your employment is irrelevant.

What's the "limited liability" part for then? Mostly contractual liability. The LLC would shield you from personal liability if you entered into a contract or took out a loan in the name of the LLC. So you can borrow money, lease property, enter into business contracts, etc. in the name of the LLC, and creditors or counter-parties won't be able to sue you in your personal capacity. It will also shield from tort liability caused by people other than yourself. Say you decide to cooperate with someone else on a freelance job. If they screw up, and you don't have a business entity, you could easily wind up with significant exposure under a partnership theory. With an LLC, that probably wouldn't happen. But it won't shield you from anything you do in the course and scope of your employment with the LLC. That's not how that works.

As others have said, the only way to protect yourself here is professional liability insurance, also called E&O by some carriers. You can get this with or without an LLC. And really, if you're thinking about freelancing without insurance, you're Doing It Wrong. Insurance should be thought of as an absolute requirement for entry into the market, part of your basic cost structure. If your clients aren't willing to pay enough for you to price that into your rates, or if you don't have enough clients to spread out that cost reasonably, you may well have no business freelancing.

You may find an LLC to be of further benefit for tax reasons, but if you aren't talking about much volume, it may not be worth it. That's truly a cost/benefit analysis which could go either way, as the only thing that could go wrong is that you pay more in initiation and registration fees than you save in taxes.
posted by valkyryn at 4:54 AM on December 18, 2011 [1 favorite]

Any recommendations for sources of E&O or Professional Liability insurance?
posted by cycleback at 6:30 AM on December 18, 2011

Check with your profession's professional organization. They may have guidelines (or rules if you are licensed) about how to structure things like this.

And valkyryn is right.
posted by gjc at 6:33 AM on December 18, 2011

Recommendations for sources: an independent insurance agency of any decent size is your best contact.
posted by yclipse at 9:40 AM on December 18, 2011

Yeah, just get yourself a broker. They'll hook you up.
posted by valkyryn at 10:19 AM on December 18, 2011

[folks, side discussions need to go to MeMail or elsewhere, don't start hurling accusations in this thread please. Thanks.]
posted by jessamyn at 11:41 AM on December 18, 2011

There is absolutely no way to know if you need errors and omissions insurance without knowing more about what type of business you will be in and what you will be doing. You should talk to your own attorney. Do not rely on legal advice from the internet.
posted by JackFlash at 12:39 PM on December 18, 2011