LLC vs sole proprietorship: what changes for freelancers

The most common misconception we hear from freelancers is that “getting an LLC” lowers taxes. For a single owner it does not change the federal tax bill by one dollar: the IRS treats a single-member LLC as a disregarded entity by default, so you file the same Schedule C and pay the same self-employment tax either way (source: IRS, single-member limited liability companies). What an LLC changes is who can be sued for what, and what you pay your state every year for that wall. Checked 2026-08-22 against the IRS single-member LLC page.

What separation buys you

Separation. If the business is sued or cannot pay its debts, a properly maintained LLC keeps the claim on the business’s assets, not your house. “Properly maintained” is load-bearing: a separate bank account, contracts signed in the LLC’s name, and no mixing of personal and business money. Commingle funds and a court can ignore the entity entirely, which lawyers call piercing the veil.

Note the ceiling on this protection: nothing shields you from your own professional mistakes. If a client sues over your work, you are personally in the suit, LLC or not. That risk is what professional liability insurance covers, and for many service freelancers the insurance matters more than the entity.

What it costs

State fees run from a one-time filing plus an annual report in most states up to California, which charges an $800 minimum franchise tax every year (source: California Franchise Tax Board). Add registered-agent fees if you use one. Against that, the sole proprietorship costs exactly nothing and starts existing the moment you invoice someone.

Our actual opinion

Start as a sole proprietor, invoice under your own name, and buy professional liability insurance before you buy an entity. Form the LLC when one of three things happens: contracts get big enough that a dispute could reach your personal savings, a client’s procurement team requires an entity, or you are heading toward an S corp election, for which the LLC is the natural wrapper. Run the S corp math at that point; the entity question and the tax-election question are separate doors, best opened in order.

State rules vary and this is not legal advice; a one-hour consult with a local attorney is cheap against an entity chosen badly.