Key points
- A sole proprietorship is the automatic, unregistered default for one-person businesses; an LLC is a legal entity you form by filing with a state.
- The SBA notes an LLC protects your personal assets (home, car, savings) from most business debts and lawsuits, while a sole proprietor can be held personally liable for the business's debts.
- By default a single-member LLC is a 'disregarded entity' for federal income tax — the IRS treats it the same as a sole proprietorship, with profit reported on Schedule C of your Form 1040.
- LLC owners and sole proprietors both pay self-employment tax on their net earnings.
- An LLC can elect to be taxed as a corporation (Form 8832), but that is an optional choice, not the default.
The default: sole proprietorship
If you do paid freelance work for yourself and never register an entity, you are a sole proprietor by default. There is no separate legal entity — you and the business are the same for legal and tax purposes.
The trade-off is liability. The SBA states plainly that a sole proprietor "can be held personally liable for the debts and obligations of the business," and describes the structure as best for "low-risk businesses and owners who want to test their business idea before forming a more formal business."
What an LLC changes: liability
An LLC is a business structure created under state law. Its main draw for freelancers is the liability shield. The SBA describes it this way: "LLCs protect you from personal liability in most instances — your personal assets, like your vehicle, house, and savings accounts, won't be at risk in case your LLC faces bankruptcy or lawsuits."
That protection is not absolute (it can be lost if you mix personal and business finances, or in cases of fraud), but for higher-risk or higher-revenue freelancing it is the core reason people form an LLC.
Taxes: usually the same by default
A common myth is that an LLC saves you tax automatically. It generally does not, by default. The IRS treats a single-member LLC as a "disregarded entity": "For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation."
In practice that means you report business profit on Schedule C of your personal Form 1040 — exactly as a sole proprietor does. The IRS confirms an individual owner of a single-member LLC "is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship."
An LLC can elect a different tax treatment (for example, S-corporation taxation) once it makes sense, but that is an active election, often best discussed with a tax professional — not a reason to form an LLC on day one.
Getting an EIN
An EIN (Employer Identification Number) is a federal tax ID for a business. The IRS issues it directly, in minutes, online — and it is free.
The IRS warns: "Beware of websites that charge for an EIN. You never have to pay a fee for an EIN." A single-member LLC that is a disregarded entity with no employees and no excise-tax liability is not strictly required to have one, but many freelancers get an EIN anyway to avoid giving out their Social Security number on tax forms and to open a business bank account.
Step by step
- Decide whether you need the liability shield now (higher-risk work, contracts, real revenue) or whether staying a sole proprietor is fine while you test the business.
- If forming an LLC: file Articles of Organization with your state's business filing office and pay the state fee (fees and rules vary by state — check your Secretary of State).
- Get a free EIN directly from the IRS online (never pay a third party for one).
- Open a dedicated business bank account and keep personal and business money separate (important for keeping the LLC's liability protection intact).
- Track income and expenses, and report business profit on Schedule C of your Form 1040 — see our US freelancer tax guide.
Good to know
- LLC formation fees, annual fees and rules are set by each state and vary widely — the SBA notes requirements differ by state, so check your own state's Secretary of State office.
- The liability shield can be pierced if you commingle personal and business funds or commit fraud — keeping clean, separate finances matters.
- An LLC does not automatically lower your taxes. Any tax election (such as being taxed as a corporation via Form 8832, or S-corp status) is a separate decision best reviewed with a licensed tax professional.
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