If you’re a freelancer or independent contractor in the U.S., one of the first legal decisions you’ll face is choosing a business structure. Should you stay a sole proprietor or form a Limited Liability Company (LLC)?
Each option has its pros and cons—and the best choice depends on your income, risk level, and long-term goals. In this article, we break down the differences between Sole Proprietorships and LLCs to help you decide what’s right for your freelance business.
What Is a Sole Proprietorship?
A sole proprietorship is the simplest and most common business structure in the U.S. It means you and your business are legally the same entity. There’s no formal registration required to start—just begin working and report your earnings on your personal tax return.
Pros:
- Easy and inexpensive to set up
- No separate tax filings
- Full control over your business
Cons:
- No personal liability protection
- Limited credibility
- Difficult to raise funds or attract investors
What Is an LLC?
A Limited Liability Company (LLC) is a legal entity separate from its owner(s). You can be the only member (Single-Member LLC) or have multiple partners (Multi-Member LLC).
Pros:
- Personal liability protection—your assets are shielded
- Tax flexibility—you can choose to be taxed as a sole proprietor, S Corp, or C Corp
- More professional image
Cons:
- Costs more to set up and maintain (state fees, annual reports)
- Must follow specific legal and tax requirements
- Some states have franchise taxes or minimum annual fees
Taxes: What’s the Difference?
- A sole proprietorship is taxed directly through your personal income (Schedule C). You pay self-employment taxes on all profits.
- An LLC, by default, is taxed the same way—but you can elect S Corporation status to potentially save on self-employment taxes.
If you earn a small amount and want to keep things simple, a sole proprietorship may suffice. But if your income grows and you want to optimize tax savings, an LLC (especially with S Corp election) may be the better path.
Liability: Are You Protected?
- Sole proprietors have no legal separation between their personal and business liabilities.
- LLC owners enjoy limited liability protection, meaning you’re generally not personally responsible for debts, lawsuits, or business obligations.
If you provide services that carry any legal or financial risk—design, marketing, consulting, etc.—forming an LLC adds a strong layer of protection.
Cost and Complexity
| Feature | Sole Proprietorship | LLC |
|---|---|---|
| Formation Cost | $0–$50 (usually free) | $50–$500+ (varies by state) |
| Annual Fees | None | $0–$800/year (varies by state) |
| Legal Documents | None | Articles of Organization, Operating Agreement |
| Tax Filing | Single Form (Schedule C) | Same, or more if S Corp elected |
When Does an LLC Make More Sense?
You should consider switching from a sole proprietorship to an LLC if:
- Your business income exceeds $30,000–$50,000/year
- You want to protect your personal assets
- You want a more professional image
- You plan to grow or take on partners or investors
- You want flexibility in how your business is taxed
How to Set Up an LLC as a Freelancer
- Choose your state
- Pick a unique business name
- File Articles of Organization with the Secretary of State
- Get an EIN from the IRS
- Open a business bank account
- (Optional) Create an Operating Agreement
🔗 Useful resource: IRS – Apply for an EIN
Final Thoughts
Both LLCs and sole proprietorships have their place in the freelance world. If you’re just starting out, a sole proprietorship is easy and efficient. But if you’re growing, seeking protection, or want long-term structure, forming an LLC may be the smartest next step.