Can I Start an LLC While Employed?

An LLC (Limited Liability Company) is a type of US company that delivers limited liability to its owners (called partners or members), protecting their personal assets from the business’s debts. A common question asked by many employees is: Can I start an LLC while I am employed, perhaps as a side project alongside my main job?

The short answer is yes. In fact, the law does not prohibit the formation of an LLC if you have another job, but there may be legal or contractual restrictions (non-competition clauses or limitations in your employment contract) and more practical obstacles, such as the time required to manage two businesses at the same time.

For some, the analysis is as fundamental as asking what a franchise agreement is when entering into a structured business model, or what a company charter is when forming a corporation, or even, can I start an LLC in IL while being employed, when considering specific state rules. Entrepreneurs who work with an expert business formation advisor often explore LLCs as a springboard to independence.

Understanding LLC Formation Basics

LLCs are very popular precisely because of the asset protection they deliver, secured by the separation of personal assets from business assets. In the event of accumulated debts or lawsuits, members do not risk their personal assets (except in cases of fraud or personal guarantees).

This is in contrast to a sole proprietorship, for example, where the owner is personally liable for debts and obligations. It is also different from a corporation, where protection is similar to an LLC but with a more rigid structure, formal procedures (articles of incorporation, board of directors), and more complex taxation.

In general, employee status does not prevent the formation of an LLC, as the laws focus more on compliance with regulations and the validity of the structure than on whether the entrepreneur already has a job.

Can I Start an LLC While Employed?

The key point is that, yes, most jurisdictions allow you to start an LLC while employed. The formation of an LLC is a legal-administrative procedure carried out with the relevant state or national authorities and is completely independent of employment status, as only compliance with legal requirements matters.

The real problem, therefore, is not legal, but contractual. In fact, there are often non-competition clauses or exclusivity obligations in employee contracts, making the process more complex and complicated. Before starting an LLC, the contract in question and any conflicts of interest that may arise must be carefully evaluated.

Reviewing Employment Contracts and Company Policies

Before starting an LLC, it is therefore essential to check the employment agreement for any restrictions on starting a parallel business. The most common are:

• Non-competition clauses and confidentiality obligations: In this case, the contract expressly prohibits the employee from founding or collaborating with companies that compete with their employer during (and sometimes after) the employment relationship. Confidentiality obligations, on the other hand, prevent the use or disclosure of confidential business information for the benefit of the new side business.
• Sector-specific considerations: In some sectors, additional clauses may apply. For example, in finance, the rules are stringent on conflicts of interest and insider trading, while in the tech sector, intellectual property and patents are more heavily protected.

It should be borne in mind that violating these contracts can have serious administrative and criminal consequences, and it is very likely that the company will dismiss the employee quickly if the new LLC creates a conflict with their current employer.

Practical Considerations When Running an LLC While Employed

Starting an LLC while already in employment is a choice that requires strong organizational skills. For many employees, it begins as a side hustle before evolving into a full-time business. The challenges are considerable, and the time spent in one’s profession and that dedicated to the upcoming business must be balanced with the current workload and personal commitments.

Here are some of the most common challenges:

• Risk of conflict of interest: This problem arises when the company finds itself operating in the same sector of activity as that of its employer. This can undermine the trust relationship and also have serious criminal consequences in the event of non-competition clauses in the contract.
• Transparency and separation of activities: Totally separating the two jobs is not always such a simple operation. It is important to maintain clarity and transparency without using the resources or tools provided by your employer to gain benefits from your company. 
• Separation of finances and legal records: Finally, an LLC must have separate bank accounts and accounting records. Your personal finances should never be mixed with company ones, as asset separation is precisely one of the characteristics that distinguishes an LLC; obtaining an EIN (Employer Identification Number) is also essential for tax filings and banking purposes.

Financial and Tax Implications of an LLC While Employed

Among the implications to consider there is certainly the separation of employee income and that generated by the LLC. This separation is, as we have seen, the basis of an LLC’s legal structure. Not only that, but earned income is always taxed as a salary, while LLC earnings follow the tax rules of this legal instrument. Therefore, the entrepreneur will have to declare both income streams. 

As regards tax deductions, a distinction must also be made here. In most jurisdictions, in fact, the LLC benefits from the pass-through taxation regime; this means that profits and losses pass directly to the earnings of its members, who will consequently be taxed on their personal returns. For an already employed person, this means that the LLC’s income will be added to the salary by increasing the tax base.

Moving on to tax deductions, LLCs can claim them for operating costs, marketing and training expenses, etc. This helps to reduce the tax impact by deducting costs that would in any case be incurred in the exercise of one’s business. 

The combination of the two incomes, however, generates great difficulties and significantly increases the accounting difficulty. For this reason, it is always advisable to rely on professionals to optimize the tax structure and avoid errors. 

Global Considerations for Starting an LLC While Employed

Although LLC is a US corporate form, there are many equivalents in many other jurisdictions. For example, in Germany they are known as GmbH, in the UK as Ltd, SARL in France and Luxembourg, and SRL in Italy and Spain. 

Labour regulations also vary from country to country, so in some jurisdictions it is permissible for employees to find and own a company as long as it is not in competition with the employer, while in others, there are strict limits, such as the obligation of exclusivity or prior authorization of the employer.

For international entrepreneurs, the complexity increases. They must be aware of both labor and corporate law regulations when establishing an LLC abroad. 

FAQs

Can I start an LLC while employed?

In most jurisdictions, yes, there are no legal obstacles to doing so. The main issue is contractual: you need to check your employment contract and the clauses it contains.

Can I start an LLC in IL while being employed?

In Illinois, as in many US states, it is possible to form an LLC even if you are an employee, provided you comply with state laws and check any contractual restrictions with your employer. 

Do I need to inform my employer if I start an LLC?

It is not mandatory to do so, but it is advisable to notify your employer if the business will be operating in the same sector or if there are non-competition clauses in the contract. 

Can I use my employer’s resources for my LLC?

No, as the activities must be completely separate. It is not possible to use the employer’s resources, tools, or information. 

How does an LLC affect my taxes if I’m employed?

Income from employment will continue to be taxed normally, except that income from LLCs will be added and will follow specific tax rules.

Can I start an LLC to prepare for leaving my job?

Of course, that’s why many entrepreneurs don’t leave their jobs when they start their own companies. It allows them to test operations and potential earnings on the side before taking that step.

References

LegalZoom. (2023). Can I Form an LLC While Employed or Working at Another Job? 

https://www.legalzoom.com/articles/can-i-form-an-llc-while-employed-or-working-at-another-job

Tailor Brands. (2023). Form an LLC While Employed. https://www.tailorbrands.com/blog/form-an-llc-while-employed

ZenBusiness. (2023). Starting an LLC While Employed.

https://www.zenbusiness.com/starting-llc-while-employed