I understand having a LLC protects my private assets (e.g. my home, vehicle, etc) from anything bad that happens with the consulting gig, but beyond that.... I have no idea.
LLC's really don't help much in consulting. First off, make sure every contract you sign as a limitation of liability related to the value of the contract - you're shooting for 1x or less, industry standard is 1-3x the contract value. I've seen them as low as the value of billings for the last 90 days. Understand that even with an LLC, if you really screw something up (negligence, willful malfeasance) they can still come after you personally.
Once you're on firmer ground with the business, you're better off buying professional liability insurance (sometimes called errors and omissions insurance). You may also want general liability insurance, especially if you get to the point where you're hiring or contracting help. This together with worker's comp covers slip and fall type claims. My advice is to set up an S corp from the start, decide when to buy insurance, and avoid the paperwork, hassle and expense of an LLC altogether.
I think Laserjet covered most of the questions, here's what I'd add.
2) Will having an LLC give me better access to tax-deferred accounts (currently all I have access to is an IRA).
The LLC doesn't do that, but earning income from a side gig does. Whether that's under the banner of an S-corp, C-corp, or sole proprietorship claimed on Schedule C (what happens if you make money without a corporation being formed), you're eligible to set up a SEP IRA or Solo 401k. The Solo-k is usually a better option and lets you get to the 53k tax deferred limit quicker. Above a certain amount (in the 180k range?) they're functionally equivalent.
3) does it matter that I would literally be the only person in the LLC?
Yes, which is why I think S-corp is a better plan for you. You'll also save on payroll taxes vs being a disregarded entity.
4) what are the downsides for having an LLC?
More overhead to set them up, more paperwork to maintain, various states treat them differently and require different filings every year. Disadvantage of an S corp is that it requires a separate business return (an LLC filing as an S corp does, too).
5) is there an income rule-of-thumb when an LLC becomes worth it? hard to say right now but in 2017 it could be in the $30k-80k range.
Depends on what you're making from your W2 also, but I'd say around 20k is enough to start getting things set up for future success. I'd get the S-corp established right away and evaluate your insurance options ASAP. Skipping the insurance means you're accepting the risk of a claim, just write your contracts the right way to mitigate this risk with or without insurance.
6) would I be better off setting it up as an S-corp, C-corp or sole-proprietor? FWIW my wife could be added, working on a limited basis (10-20 hours/month).
C-corp won't be beneficial because of double taxation. S-corp is pass-through taxation and you get to take distributions to avoid payroll taxes. Paying your wife means you'll pay separate payroll taxes on her income, but also get to make retirement contributions for her; probably not what you want to do at 30-80k, but you have some options as the business ramps up.
I'll leave you with a few simple these rules may help you grow your business.
Axecleaver's Steps for Starting Your Own Consulting Business
WHAT
1. Cut your minimum monthly living expenses as deeply as possible.
2. Build up a transition fund to pay your expenses for 6-12 months.
3. Write a business plan: visit
www.score.org for templates.
3a. Set your services and rates (1/1000th of your annual salary is a good starting point).
4. Identify customers.
5. Set meetings to sell your services. If you sell everything you pitch, then you're not pitching to enough people. Shoot for a 25% close rate.
6. Keep your day job and deliver on nights/weekends until you have at least 20-40h/week of deliverable work sold.
7. Incorporate your business.
8. Once your day job is impacting your ability to deliver, turn in your notice.
9. Purchase insurance: errors and omissions/professional liability, general liability
10. When your sales exceed your ability to deliver, add staff.
11. Hire a payroll service, HSA and 401k providers. (Caveat: explore Solo-K and SEP-IRA if you never intend to have staff.)
WHY
1. If you run out of money, you're going back to work for The Man for the rest of your life.
2. Most consultants bill monthly at the end of the month, on net 30 terms. Clients can take up to 45 days to pay. Large checks take seven days to clear. This means a job you start working on June 1 may not make funds available to you until August 22 - nearly 12 weeks.
3. A business plan template will ask you questions you haven't thought to ask yet - what are your services and what is your rate, who are your customers, how will you market to them, what does your staffing plan look like, will you offer products or just services, what margins will you use?
4. Use every resource at your disposal to find customers: your rolodex, temp agencies, headhunters, Craigslist, etc.
5. Pipeline management is a critical skill in the consulting business. You should be selling services at least three months out, but this takes time to develop. You should always be selling.
6. Building a reliable customer list takes time. Deliver against your core services while keeping your day job. Get used to 80-100h work weeks.
7. S-corps are popular choices for consultants because it allows you to pay yourself distributions which avoids payroll taxes on a portion of your income.
8. Ease the transition into consulting by keeping your day job while you build your experience and customer list.
9. Protect yourself and your company with liability insurance. Many customers and prime vendors require it. Look for a million per instance in coverage as a starting point.
10. Hire staff as your company grows. Always be selling.
11. Outsource the administrative tasks that make the most sense.