Every freelancer is automatically a sole proprietor the moment they take paid work, an LLC is something you opt into. Here's what actually changes if you do.
If you've never filed anything, you're already a sole proprietor. There's no paperwork, no formation fee, and your business income and personal income are legally the same thing, you report it on your personal tax return (Schedule C). The tradeoff is personal liability: if the business is sued or owes money, your personal assets aren't legally separated from it.
| Sole Proprietor | LLC | |
|---|---|---|
| Setup | Automatic, no filing | State filing + fee (often $50–$500, varies by state) |
| Personal liability | Not separated from the business | Generally separated (with caveats, see below) |
| Taxes | Personal return, self-employment tax on all profit | Same by default, an LLC is a "pass-through" entity unless you elect S-corp status |
| Ongoing cost | None | Annual state fees/reports in most states |
| Perceived credibility | Fine for most freelance clients | Can read as more established for larger contracts |
An LLC only protects personal assets if it's actually treated like a separate business, a dedicated business bank account, no mixing personal and business expenses, and a written contract with clients. Courts can and do disregard the LLC's protection ("piercing the corporate veil") when it's been treated as a personal wallet. If you're not going to keep the finances separate, the liability benefit of the LLC is mostly theoretical.
An LLC tends to make sense once there's real liability exposure (client work that could cause financial harm if something goes wrong, physical work, anything contract-heavy with larger companies) or once income is high enough that an S-corp election on top of the LLC could meaningfully reduce self-employment tax. For a new freelancer testing the waters with small clients, staying a sole proprietor and revisiting the decision after a year of real income data is a completely reasonable default.
See how to reflect it correctly on your invoices in How to invoice as an LLC, or just build one now.
Make an invoice →