As an independent contractor should I set up an LLC to best protect my assets?

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As an independent contractor should I set up an LLC to best protect my assets?

I recently became in independent contractor for a company doing phone sales from my home. I’m wondering if I should make my business an LLC and what benefits that will give me? I want to protect my personal assets and keep the business separate.

Asked on August 3, 2010 under Business Law, Arizona

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

You should definitely set up either a limited liability company or a corporation. If you don't establishh one, then legally, you and the business are one. That means that if you incur liability as a business--such as for breaching a contract; or even for an accident you caused--you are personally responsible for it. That means that business liability could wipe you out personally. Either an LLC or a corporation, however, is a separate legal entity that acts as a liablity "firewall"--you will not be personally resonsible for the debts or obligations of your business. The protection is invaluable (though maintaining adequate insurance anyway is also a good idea).

As for which is better--generally speaking, an LLC is a bit simpler and  more flexible for a small business, and involves less paperwork. A corporation can be better if you anticipate selling the business--you can simply sell the shares in a very straightforward manner. Either one can give you the same "pass through" tax status, so there's no double or corporate taxation. (For a corporation, you'd elect subchapter-S status.) A business attorney can advise you of the pros and cons of each and help you set it up.


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