If you own and operate a temp agency, you’ve probably at least considered forming a limited liability company (LLC) for your business. The LLC is a popular option for all sorts of businesses looking for asset protection, and it has a handful of other major advantages as well.
Of course, forming an LLC isn’t the only option for your staffing firm, so our mission is to help you decide if it’s the best choice for you. There are many different factors to consider when you’re forming a business entity for your temp agency, so let’s dive into the details of the LLC to figure out if you should form one for your business.
Need Help Starting Your LLC?If you want to make sure your LLC is formed correctly, hire an LLC service. Below are the top two that will take care of all the legal paperwork:
ZenBusiness – $39: If getting the most value out of an LLC service is your priority, choose ZenBusiness. They charge one of the lowest rates online and include all the most important features when starting a business. IncFile – $0: If you're on a strict budget and prefer using the cheapest LLC service, choose IncFile. They will form an LLC for free (plus state filing fee) and give you great features along the way.
ZenBusiness – $39: If getting the most value out of an LLC service is your priority, choose ZenBusiness. They charge one of the lowest rates online and include all the most important features when starting a business.
IncFile – $0: If you're on a strict budget and prefer using the cheapest LLC service, choose IncFile. They will form an LLC for free (plus state filing fee) and give you great features along the way.
What Is an LLC?
First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
Why Starting an LLC for a Temp Agency Is Important
The top reason to form an LLC for a temp agency is to gain access to the personal asset protection provided by this business structure. Whether you operate your business as a small agency with a handful of temps or a full-fledged staffing firm with a wide variety of clients, you need the limited liability protections that an LLC can provide.
As an example, let’s say that one of your temps slips on a wet spot on your floor while in your office for an interview, falls over, and injures themselves. If you operate your staffing firm as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that individual decides to sue your business.
On the other hand, if you form an LLC for your temp agency, and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a temp agency. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.
Your staffing firm LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your agency itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.
You can also choose for your temp agency to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most U.S.-based staffing firm businesses have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.
S corp taxation can help your agency save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.
Compared to operating a sole proprietorship or general partnership staffing firm, the S corp taxation model can save you quite a bit of cash that you can use to make improvements to your office space and cover other expenses, rather than writing a big check to Uncle Sam.
Finally, an LLC structure can enhance the credibility of your temp agency business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a staffing firm, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a temp agency.
In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights. This means that if another agency wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.
With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.
How to Start a Temp Agency LLC
The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:
The 3 Best LLC Websites
When forming an LLC for your business, you generally have three main options. You can form your own LLC using the DIY method, you can hire an attorney, or you can hire an online business formation service.
The DIY route can require quite a bit of effort, and if you’re not comfortable with the process, it can cause some undue stress. As for hiring a lawyer, many startups can’t afford to spend the thousands of dollars it can cost for an attorney to form your business entity.
This leads us to the third option, hiring an online LLC service. There are dozens of reputable companies offering this service these days, and they can all save you a tremendous amount of money compared to an attorney. In addition, while these companies may not have as much expertise as an attorney does, they still provide a considerable amount of peace of mind compared to the DIY route.
If you want to take a look at the top options for online business formation services, head on over to our guide to the seven best LLC setup services available. In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best options for business formation service:
🥇 ZenBusiness – Best Overall Value
ZenBusiness truly has it all. They provide complete LLC formation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s the best LLC service online.
IncFile – Cheapest LLC Service
IncFile has a business formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and IncFile is an excellent choice for LLC formations.
Northwest – Premium Support
Northwest is a bit more expensive, but their industry-best registered agent service includes local scanning of every document they receive on your behalf. They also have the best customer support for LLC services. If you’re looking for a premium service, Northwest is excellent.
Additional Resources for Starting a Temp Agency
- TemPay: TemPay is an invaluable resource for starting a new staffing firm, as they are a “financial services and management company that provides fast and reliable money-only factoring and full-service back-office outsourcing services for temporary staffing agencies.” They help temp agencies manage their cash flow and payroll, and they even have a brief guide to starting your own staffing firm.
- GrowThink’s How to Start a Staffing Agency: If you’re looking for a comprehensive overview of how to form your own temp agency, this is the resource you need. GrowThink’s guide is split up into 15 chapters that take you through the initial startup processes all the way through growing and expanding your staffing firm.
- What Clients Look for When Hiring a Staffing Agency: This article from Monster takes a look at staffing agencies from a slightly different perspective and asks what makes a company hire a certain temp agency. Within this article, you’ll find nine tips and tricks to make your staffing firm as attractive as possible for companies in need of temporary help.
- Start Your Own Staffing Service book: This book produced by Entrepreneur Media is an excellent resource for creating a new temp agency. Over the book’s 225 pages, you’ll learn everything you need to know about setting up a staffing firm from scratch. You’ll even find advice on how you can start a general temp agency compared to an industry-specific firm.
- Commercial Capital: Commercial Capital is another invoice and purchase order factoring finance firm, but the page we linked to is actually their excellent “How to Start and Grow a Staffing Agency” article. This resource goes step by step through the process of forming a temp agency, and helps you evaluate your skillset, choose the right industry, determine startup costs and cash flow, find employees, and find clients.