One question I get asked is, “I’m an independent contractor for XYZ. Do I need an LLC?”
Indepedent Contractors for Well Known Companies
Many businesses such as Mary Kay Cosmetics, Beachbody, Optavia, and Amway have their work/sales force as independent contractors. They are paid a commission for the products they sell, and that income is reported to the IRS as a 1099. The independent contractor can deduct business expenses. The mantra, “In business for yourself, but not by yourself,” is often used.
The problem is that an independent contractor is solely liable (there is no employer to step in and assume liability or to be vicariously liable for the employee’s actions). It is good for the company but not necessarily good for the independent contractor. There are several instances when this will affect you in a significant way.
Liability for Downline Independent Contractors
First, if one of your “downline” independent contractors does something against the law, often, when a plaintiff files a lawsuit, they will name everyone possible. This includes people “up” from the person they are suing who may have more money. They will try to find you liable for contributing to the illegal act of the independent contractor.
This means that if you do not have an LLC, you may be found personally liable and lose any significant assets you may have. The plaintiff could also garnish your non-independent contractor wages. At the very least, you may have to pay to defend yourself against the lawsuit, which is very expensive. The LLC is likely to have fewer assets and essentially be judgment-proof. The plaintiff is likely not even to file the lawsuit against you. The LLC will have insufficient assets, and the plaintiff cannot pierce the liability shield to access your personal assets.
Liability for Company
Second, if the company that you are affiliated with is found liable due to a defective product (or some other reason that you could be found liable) as the distributor or seller of the product, you may be found liable as well. As mentioned above, at the very least, you will have to defend yourself against a lawsuit.
Final Thoughts on Independent Contractor Liability
An LLC is not the answer to every problem. However, it is the answer to many problems. If you have a home or have significant assets and are an independent contractor having an LLC will shield your personal assets from a possible judgment. Given how inexpensive it is to form an LLC compared to litigation or judgment costs, the best option is to protect yourself.
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