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Comparison · Business

Sole Proprietor vs LLC

A sole proprietorship is the default — you don't form anything, you just start working and report income on Schedule C. An LLC is a state-registered business entity that legally separates your personal assets from business liabilities. For most freelancers earning under $50K with low liability risk, sole prop is enough. Once you start signing client contracts or hiring, an LLC pays for itself.

Factor Sole Proprietor LLC
Formation cost $0 $50–$500 + annual fee ($0–$800 by state)
Tax filing complexity Schedule C on personal return Same (single-member LLC) or 1065 (multi-member)
Self-employment tax 15.3% on net profit Same (unless S-Corp elected)
Personal liability protection None — personal assets at risk Yes — limited to business assets
Banking Can use personal account Separate business account required
S-Corp election eligible No Yes (after $60K+ profit, can save SE tax)
Credibility with clients Lower (just your name) Higher (LLC suffix on contracts)

Choose Sole Proprietor when…

You're testing a side project, earning under $30K from it, working in a low-liability field (writing, design, light consulting), and the annual LLC fee in your state would eat 5%+ of profit.

Choose LLC when…

You sign client contracts with indemnification clauses, work in a field where lawsuits happen (consulting, agency, anything touching people's money), earn $50K+ annually (S-Corp election becomes valuable), or want banking/credit separation between personal and business.

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Frequently asked questions

Does an LLC save me taxes?

Not by default. A single-member LLC is taxed identically to a sole proprietorship by default ("disregarded entity"). The tax savings come only when you elect S-Corp status after profit exceeds ~$60K — see our LLC vs S-Corp comparison.

How much does an LLC cost per year?

Formation: $50–$500 one time. Annual fees vary wildly by state: $0 (Ohio) to $800 (California). Add ~$100/yr for a registered agent service if you don't want your home address on public record.

Can I form an LLC for a side hustle?

Yes, and many people do. The protection scales with your risk, not your revenue. A $10K/yr LLC with one big enterprise client signing a $2M-coverage contract still benefits from the liability separation.

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