What are the benefits of forming an LLC when contracting for a high-paying job?

My recruiter is asking me to do some tax things that I don't really understand. He's also a bit of a snake so I am worried.

I am pursuing a high-paying position through a recruiter. I will not be paid by the hiring company, but by the recruiter's company. The recruiter's company is just a private LLC.

The recruiter expects me to form an LLC which his company will pay instead of just paying me directly.

I do not at all understand why he wants me to do this. I ask but he just suggests that it's in my best interest to do so for tax purposes.

  • 23
    Please specify a country. Tax rules vary. Commented Aug 2, 2015 at 18:05
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    the only thing sketchy about this is the presumption that it is sketchy just because you don't understand it.
    – CQM
    Commented Aug 2, 2015 at 22:44
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    Given that he doesn't think it's necessary to include the country, and that he calls the company an LLC, it's safe to say he's in the US. Commented Aug 3, 2015 at 10:46
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    @CaptainCodeman - littleadv is correct. We shouldn't make that assumption. LLCs are not only US entities. For that reason, the 30+ answer aside, the OP should confirm country before expecting a good response. Commented Aug 3, 2015 at 16:49
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    I exclusively work using this arrangement. I have a LLC taxed as an S-CORP (US). There are many pros and cons which a CPA/ Business attorney can explain. There are many tax benefits to doing this. Most of those benefits directly relate to filing as an S-CORP. Be aware, forming an LLC without the S-Corp designation will increase your tax liability because you will be required to pay self-employment tax on all of your revenue.
    – marteljn
    Commented Aug 3, 2015 at 16:58

7 Answers 7


Your recruiter is likely trying to avoid having to pay the employer's side of employment taxes, and may even be trying to avoid having to file a 1099 for you by treating your relationship as a vendor/service provider that he is purchasing services from, which would make your pay just a business expense. It's definitely in his best interest for you to do it this way. Whether it's in your best interest is up to you. You should consult a licensed legal/tax professional to help you determine whether this is a good arrangement for you. (Most of the time, when someone starts playing tax avoidance games, they eventually get stung by it.)

The next big question: If you already know this guy is a snake, why are you still working with him? If you don't trust him, why would you take legal/tax advice from him? He might land you a high-paying job. But he also might cause you years of headaches if his tax advice turns out to be flawed.

  • 13
    This is definitely not, in and of itself, a good arrangement. But it's not unreasonable for the recruiter to want to do this. Treating the asker as an employee is more costly for the recruiter and their company. I think a better way to frame this, generally, is as a tradeoff – the asker should negotiate greater compensation in exchange for the inherent responsibilities of being their own employer. Commented Aug 2, 2015 at 23:46
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    Great answer. I would add that registering a business entity can have positive effects, but there are surprising costs involved, too. Therefore, you should be paid more as a contractor than you would be as an employee. As Kent indicates, contact a CPA or small business lawyer before you register a business entity. Commented Aug 2, 2015 at 23:47
  • Why would the recruiter have to pay employment (payroll) taxes? I would imagine the arrangement would be 1099 if corp-to-corp wasn't possible. Commented Aug 3, 2015 at 13:29
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    If the relationship to the recruiter appears in all aspects to be that of employer-employee, regardless of the business structure, the IRS may determine that it is actually such a relationship and will treat it as such. They could also impose fines and charge retroactive taxes. Dealing on a personal basis invites such scrutiny, which is likely the reason why he wants to do a business-to-business deal.
    – Kent A.
    Commented Aug 3, 2015 at 13:35
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    For instance, having an open-ended employment arrangement (not delimited by any contractual terms), and imposing requirements on where/when the work is performed, are major contributing factors in deciding that it's really just an employment relationship. If OP is going to have freedom on when/where to do the work, and there is a time limit, or some other delimiting factor included in both contracts, then OP is truly a contracted entity. Otherwise, it's up to IRS's interpretation. I am not a lawyer, though.
    – Kent A.
    Commented Aug 3, 2015 at 14:08

Be careful, this may be disguised employment

This sounds very like disguised employment. You act like an employee of the company, but your official relationship with them is as a contractor. You gain none of the protection you get from being an employee, and this may make you cheaper, less risky and more desirable for the company who is hiring you.

Depending on your country you may also pay corporation tax rather than income tax, which may represent a very significant saving. Also, the company hiring you may not have to pay PAYE, national insurance, stakeholder pension, etc.

Subcontracting is great, disguised employment is not

This arrangement is normal and legal providing you genuinely are acting as a subcontractor. However if you are behaving as an employee (desk at the company, company email, have to work specific hours in a specific location, no ability to subcontract, etc.) you may be classified as a disguised employee.

In the UK it used to be common practice for highly paid employees to set up shell companies to avoid tax. This will now get you into hot water. Google IR35

Check the rules that apply in your jurisdiction

It sounds like your relationship in this case is directly with the recruiter. You will have to consider if the recruiter is acting as your employer, or if you remain a genuinely independent agent. The duration of your contract with the recruiter will have a bearing on this. In the UK there are a whole series of tests for disguised employment.

This is a good arrangement provided you go in with your eyes open and an awareness of the legislation.

However you should absolutely check the rules that apply in your country before entering into this agreement. You could potentially be stung very badly indeed.

  • 7
    Not necessarily; the asker wrote "... contracting for a high-paying job" and 'job' can refer to a project not just a position (of employment). Commented Aug 2, 2015 at 23:42
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    This is an extremely common and above-board arrangement. It isn't employment, it is sub-contracting.
    – marteljn
    Commented Aug 3, 2015 at 17:11
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    The answer states its illegal in the UK. It categorically is not. the answer is very misleading I don't why its been voted up. Commented Aug 4, 2015 at 12:03
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    Whoah, careful there! While there are plenty of legitimate subcontractors, disguised employment is definitely a big deal in the UK. Given that the OP a) mentions a "high-paying position" (not a project) and b) seems surprised by the requirement to set up an LLC, I think that there's a very good chance IR35 applies. Commented Aug 4, 2015 at 15:35
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    IR35 applying in no way makes it "very" (or even slightly) "illegal". Commented Aug 4, 2015 at 17:37

There are a few sites out there that can give you some reasoning behind the request. LegalZoom, for instance.

To quote the LZ doc in case the link dies:

Employee vs. Independent Contractor

If a worker is an employee, the employer is responsible for paying Social Security, unemployment insurance, Medicare, and possibly other costs like workers' compensation insurance for the employee; at the end of the tax year, the employer is responsible for compiling all necessary payroll reports, including W-2 forms.

If a worker is an independent contractor, the employer is not responsible for any of the above taxes or payments, and the only added paperwork is the issuing of a 1099 to the independent contractor at the end of the tax year, if he or she has made more than $600 with the employer.

As Kent suggested, you should speak with an attorney (really you need one if setting up an LLC). There are a lot of companies out there these days that try to classify people as contractors rather than full-time employees as it gets them out of paying benefits and dealing with taxes. This is being heavily cracked down on, and several "contractor" employees are winning lawsuits to get full-time status.

If you are truly acting as a contractor, then setting up an LLC can help with a few items such as taxes and protection on certain business aspects (see comments below regarding this). It's easy and relatively cheap (cost me about $250 with extra legal advice tacked on). If you are reporting directly to a manager with the company, or really working in any way that isn't consistent with the definition of a contractor, then I'd turn down the offer and ask to be made a FT employee.

Additional information: https://www.sba.gov/content/hire-contractor-or-employee

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    LLC provides zero protection to the member for liability resulted from his own actions. In essence - unless you have employees working for you, LLC limits nothing for an active business. It is useful to hold passive business, like rentals etc, where the liability doesn't arise from the member's actions.
    – littleadv
    Commented Aug 2, 2015 at 22:58
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    That's true, littleadv. It kind of depends what kind of job you're working. If it's a job where you have the risk of being able to physically harm someone, then yes, you can be liable. Financially, regarding creditors and loans (as long as you don't personally back them), an LLC will protect you. Here are some specifics about what protections you do and don't have: nolo.com/legal-encyclopedia/llc-basics-30163.html
    – BobbyScon
    Commented Aug 2, 2015 at 23:03
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    Again - creditors and loans these are passive assets/liabilities. The OP is talking about contractor work, which is an active business. He's not talking about forming LLC to take a loan.
    – littleadv
    Commented Aug 2, 2015 at 23:14

I don't know about the US, but in the UK this is common practice, even required in some situations, and not sketchy at all. It's perfectly legal, saves you tax, and protects you from a legal standpoint. (i.e. what if you break something and your employer wants to sue you?)

This is what companies are for, they are legal entities that are separate from an individual. There is no requirement for a company to have more than one employee.

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    who voted this down, its correct Commented Aug 4, 2015 at 12:07

The "independent contractor" vs. "employee" distinction is a red herring to this discussion and not at all important just because someone suggested you use your LLC to do the job.

Corp-2-Corp is a very common way to do contracting and having an LLC with business bank accounts provides you with more tax deductions (such as deducting interest on credit lines).

Some accounting practices prefer to pay entities by their Tax ID numbers, instead of an individual's social security number. The actual reasoning behind this would be dubious, but the LLC only benefits you and gives you more advantages by having one than not.

For example, it is easier for you to hire subcontractors through your LLC to assist with your job, due to the opaqueness of the private entity. Similarly, your LLC can sign Non Disclosure and Intellectual Property agreements, automatically extending the trade secrets to all of its members, as opposed to just you as an individual. By signing whatever agreement with the company that is paying you through your LLC, your LLC will be privy to all of this.

Next, assuming you did have subcontractors or other liability inducing assets, the LLC limits the liability you personally have to deal with in a court system, to an extent. But even if you didn't, the facelessness of an LLC can deter potential creditors, for example, your client may just assume you are a cog in a wheel - a random employee of the LLC - as opposed to the sole owner.

Having a business account for the LLC keeps all of your expenses in one account statement, making your tax deductions easier. If you had a business credit line, the interest is tax deductible (compared to just having a personal credit card for business purposes).

Regarding the time/costs of setting up and managing an LLC, this does vary by jurisdiction. It can negligible, or it can be complex. You also only have to do it once. Hire an attorney to give you a head start on that, if you feel that is necessary.

Now back to the "independent contractor" vs. "employee" distinction:

It is true that the client will not be paying your social security, but they expect you to charge more hourly than an equivalent actual employee would, solely because you don't get health insurance from them or paid leave or retirement plans or any other perk, and you will receive the entire paycheck without any withheld by the employer. You also get more tax deductions to utilize, although you will now have self employment tax (assuming you are a US citizen), this becomes less and less important the higher over $105,000 you make, as it stops being counted (slightly more complicated than that, but self employment tax is it's own discussion).

  • "the LLC only benefits you" is not clear. Assuming U.S., there are $/time costs with an LLC - registration fee, reporting requirements, possible franchise/business tax. It varies by state.
    – SeraM
    Commented Aug 3, 2015 at 15:25
  • @phaedra I elaborated now
    – CQM
    Commented Aug 3, 2015 at 15:36
  • Nice additions, upvoted.
    – SeraM
    Commented Aug 3, 2015 at 15:40

This is pretty normal.

I am in the UK and currently doing the exact same thing.

As some answers state there is additional tax law called IR35. But thats all it is, an additional tax law that may be applicable to your situation (it very well may not). It is all perfectly legal and common (all my university friends now do it).

You will be the director of a company, and invoice the recruiters company. This has benefits and disadvantages.

Personally I love it, but each to their own. Don't do it if you don't want to.


LLC is, as far as I know, just a US thing, so I'm assuming that you are in the USA. Update for clarification: other countries do have similar concepts, but I'm not aware of any country that uses the term LLC, nor any other country that uses the single-member LLC that is disregarded for income tax purposes that I'm referring to here (and that I assume the recruiter also was talking about).

Further, LLCs vary by state. I only have experience with California, so some things may not apply the same way elsewhere. Also, if you are located in one state but the client is elsewhere, things can get more complex.

First, let's get one thing out of the way: do you want to be a contractor, or an employee? Both have advantage, and especially in the higher-income areas, contractor can be more beneficial for you. Make sure that if you are a contractor, your rate must be considerably higher than as employee, to make up for the benefits you give up, as well as the FICA taxes and your expense of maintaining an LLC (in California, it costs at least $800/year, plus legal advice, accounting, and various other fees etc.).

On the other hand, oftentimes, the benefits as an employee aren't actually worth all that much when you are in high income brackets. Do pay attention to health insurance - that may be a valuable benefit, or it may have such high deductibles that you would be better off getting your own or paying the penalty for going uninsured.

Instead of a 401(k), you can set up an IRA (update or various other options), and you can also replace all the other benefits.

If you decide that being an employee is the way to go, stop here.

If you decide that being a contractor is a better deal for you, then it is indeed a good idea to set up an LLC. You actually have three fundamental options: work as an individual (the legal term is "sole proprietorship"), form a single-member LLC disregarded for income tax purposes, or various other forms of incorporation.

Of these, I would argue that the single-member LLC combines the best of both worlds: taxation is almost the same as for sole proprietorship, the paperwork is minimal (a lot less than any other form of incorporation), but it provides many of the main benefits of incorporating.

There are several advantages. First, as others have already pointed out, the IRS and Department of Labor scrutinize contractor relationships carefully, because of companies that abused this status on a massive scale (Uber and now-defunct Homejoy, for instance, but also FedEx and other old-economy companies). One of the 20 criteria they use is whether you are incorporated or not. Basically, it adds to your legal credibility as a contractor.

Another benefit is legal protection. If your client (or somebody else) sues "you", they can usually only sue the legal entity they are doing business with. Which is the LLC. Your personal assets are safe from judgments. That's why Donald Trump is still a billionaire despite his famous four bankruptcies (which I believe were corporate, not personal, bankrupcies). Update for clarification Some people argue that you are still liable for your personal actions. You should consult with a lawyer about the details, but most business liabilities don't arise from such acts. Another commenter suggested an E&O policy - a very good idea, but not a substitute for an LLC.

An LLC does require some minimal paperwork - you need to set up a separate bank account, and you will need a professional accounting system (not an Excel spreadsheet). But if you are a single member LLC, the paperwork is really not a huge deal - you don't need to file a separate federal tax return. Your income will be treated as if it was personal income (the technical term is that the LLC is disregarded for IRS tax purposes). California still does require a separate tax return, but that's only two pages or so, and unless you make a large amount, the tax is always $800. That small amount of paperwork is probably why your recruiter recommended the LLC, rather than other forms of incorporation.

So if you want to be a contractor, then it sounds like your recruiter gave you good advice. If you want to be an employee, don't do it.

A couple more points, not directly related to the question, but hopefully generally helpful:

If you are a contractor (whether as sole proprietor or through an LLC), in most cities you need a business license. Not only that, but you may even need a separate business license in every city you do business (for instance, in the city where your client is located, even if you don't live there). Business licenses can range from "not needed" to a few dollars to a few hundred dollars. In some cities, the business license fee may also depend on your income.

And finally, one interesting drawback of a disregarded LLC vs. sole proprietorship as a contractor has to do with the W-9 form and your Social Security Number. Generally, when you work for somebody and receive more than $600/year, they need to ask you for your Social Security Number, using form W-9. That is always a bit of a concern because of identity theft.

The IRS also recognizes a second number, the EIN (Employer Identification Number). This is basically like an SSN for corporations. You can also apply for one if you are a sole proprietor. This is a HUGE benefit because you can use the EIN in place of your SSN on the W-9. Instant identity theft protection.

HOWEVER, if you have a disregarded LLC, the IRS says that you MUST use your SSN; you cannot use your EIN! Update: The source for that information is the W-9 instructions; it specifically only excludes LLCs.

  • LLC is definitely not a US-only thing, however in different countries there are different legal meanings to what a LLC is. In Europe, LLC is what in the US is called "corporation". That is why it is important for the OP to mention the country he's from. Also, there are a lot of things in your answer that are incorrect or imprecise with regards to the LLCs in the US. For example, LLC does not shield you from liability for your own actions, which is why they're useless for sole proprietors who do the work themselves and have no employees. E&O insurance is much better than mere LLC.
    – littleadv
    Commented Aug 3, 2015 at 7:16
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    BTW you cannot use EIN as a sole proprietor on W9 - for exactly the same reason you cannot use it as a SMLLC.
    – littleadv
    Commented Aug 3, 2015 at 7:17
  • Just a small tidbit: IRA is not a drop-in replacement for a 401K. The contribution limits are much smaller for an IRA, and there are eligibility limits on the tax deductability if your income is too high.
    – Kent A.
    Commented Aug 3, 2015 at 12:13
  • @littleadv The gist of your comment, I agree: make sure you get good legal and accounting advice. As for LLC in Europe: I only know about Germany, and they have very different corporate forms. The closest is probably the GmbH, but there is no equivalent to a disregarded LLC. The information about using the EIN came from a very conscientious CPA, and is supported by the W-9 instructions. The W-9 instructions only mention disregarded LLCs, but not sole proprietorships. Commented Aug 4, 2015 at 18:57
  • @littleadv Liability doesn't just arise from your own actions, but from many sources. E&O insurance is not a replacement but a complement to an LLC (and it can also be a lot more expensive). Commented Aug 4, 2015 at 19:00

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