Disclosure: This page contains an affiliate link (marked). We may earn a commission at no cost to you. Verdicts are our own.
If you freelance without forming anything, you are a sole proprietor by default. You can form a limited liability company (LLC) with your state. People often assume an LLC cuts their taxes; for most one-person businesses it doesn't. Here is what really changes.
| Sole proprietor | Single-member LLC | |
|---|---|---|
| Setup | None (a local business license or "doing business as" registration may apply) | File with your state, pay its fee, usually keep an operating agreement |
| Federal income tax | Schedule C on your personal return | Same by default (the IRS treats a single-member LLC as a "disregarded entity") |
| Self-employment tax | 15.3% on net earnings | Same by default |
| Personal liability for business debts | You are personally responsible | Generally limited to what you put in, if you keep things separate |
| Ongoing cost | Low | State annual fees or taxes, which vary widely by state |
What an LLC can protect you from
An LLC can separate your personal assets from some business debts and lawsuits, for example a client's claim connected to a contract dispute with the business. It does not usually protect you from your own professional mistakes or from debts you personally guarantee, and the protection can be lost if you mix personal and business money. Keep a separate business bank account (see our bank account guide) and consider business insurance.
Taxes: what stays the same
A single-member LLC still reports profit on Schedule C and still pays self-employment tax, so the self-employment tax calculator and quarterly estimates work the same either way. The IRS explains the classification rules on its LLC page.
The S corporation election
An LLC can elect to be taxed as an S corporation (Form 2553). Some higher-earning freelancers do this to reduce self-employment tax on part of their profit, but it requires running payroll, paying yourself a "reasonable salary", filing a separate business return and often paying more for accounting. It usually only makes sense once profit is comfortably high. Ask a CPA to run the numbers for your state before electing.
How to decide
- Stay a sole proprietor if your work is low-risk, your income is modest and you want the least paperwork.
- Consider an LLC if you sign larger contracts, have physical risk (equipment, events), hire help or a client requires it.
- Check your state's cost first. Annual fees range from small to several hundred dollars.
FAQ
Do I need an LLC to open a business bank account?
Not always. Many banks allow sole proprietors to open business accounts using their name or a "doing business as" registration. Requirements differ by bank.
Will an LLC lower my taxes?
Not by itself. A single-member LLC is taxed like a sole proprietorship unless you elect otherwise.
Do I need an EIN?
A sole proprietor without employees can usually use their SSN, but an EIN is free and keeps your SSN off W-9s. A multi-member LLC or one with employees needs one.