Quick answer: if you start a side hustle alone and do not register anything, you are automatically a sole proprietor. That is simple and free, but your personal assets are not separated from the business. An LLC is a state-registered business that can shield personal assets from many business debts and lawsuits, but it costs filing fees and, in some states, annual fees. For federal taxes, a single-member LLC is taxed the same way as a sole proprietorship by default, on Schedule C. Many side hustlers start as sole proprietors and form an LLC once income, risk or clients grow.
One of the first questions new side hustlers ask is whether they need an LLC. Online advice often makes it sound mandatory, while others say it is a waste of money. The truth sits in the middle and depends on what you do, how much risk it carries and where you live.
This guide compares the two most common setups for solo side businesses: the sole proprietorship and the limited liability company. It covers how each works, liability, taxes, costs, paperwork and banking, and gives a simple framework for deciding. For ideas on what business to start in the first place, see our list of side hustle ideas you can start this year.
Sources: U.S. Small Business Administration, Choose a business structure; IRS guidance on sole proprietorships, single-member LLCs, self-employment tax and Employer Identification Numbers; California Franchise Tax Board on the LLC annual tax; FinCEN beneficial ownership information updates. This is general information, not legal or tax advice. Rules vary by state, so check your state’s business filing office. Checked October 2026.
What Is a Sole Proprietorship?
A sole proprietorship is an unincorporated business owned and run by one person. According to the SBA, you are automatically a sole proprietor if you do business activities alone and do not register as any other kind of business.
How it works
- No formation filing: there is nothing to register with the state to exist as a sole proprietor, though you may still need local licenses or permits.
- No legal separation: the business and the owner are the same legal person. The SBA notes that you can be held personally liable for the debts and obligations of the business.
- Taxes on your personal return: you report business income and expenses on Schedule C with your Form 1040.
- Your name or a trade name: you can operate under your own name or register a “doing business as” (DBA) name with your county or state.
Pros
- Free and immediate
- Minimal paperwork
- Simple taxes
- Easy to close
Cons
- No personal asset protection
- Can seem less established to some clients
- Harder to bring in partners or investors
The key difference: a sole proprietorship is not a separate legal entity, while an LLC is. That legal separation is what can shield personal assets from many business debts and liability risks.
What Is an LLC?
A limited liability company is a business structure created under state law. You form one by filing articles of organization, sometimes called a certificate of formation, with your state and paying a fee.
How it works
- Separate legal entity: the LLC exists apart from you, which generally protects personal assets, like your home and savings, from business debts and lawsuits against the business.
- Flexible taxation: the IRS treats a single-member LLC as a “disregarded entity” by default, so its income goes on your Schedule C, just like a sole proprietorship. An LLC can also elect to be taxed as an S corporation or C corporation.
- Ongoing requirements: many states require annual or biennial reports and fees, and you usually must have a registered agent with an address in the state.
Pros
- Personal liability protection for business debts and claims, in most cases
- Professional appearance
- Tax flexibility as you grow
- Easier to add owners later
Cons
- Filing fees and, in some states, high annual fees
- More paperwork
- Protection can be lost if you mix personal and business money
Sole Proprietor vs LLC: Side-by-Side Comparison
| Factor | Sole proprietorship | Single-member LLC |
|---|---|---|
| Setup | Automatic | File with the state |
| Startup cost | Usually none beyond local licenses | State filing fee, varies widely |
| Ongoing cost | Usually none | Annual report or tax in many states |
| Personal liability | Owner personally liable | Generally limited to business assets |
| Federal income tax | Schedule C | Schedule C by default |
| Self-employment tax | Yes | Yes, by default |
| Paperwork | Minimal | Moderate |
| Bank account | Recommended | Strongly recommended |
| Credibility | Fine for most gigs | Can help with larger clients |
Sole Proprietor vs LLC Taxes: Less Different Than You Think
Many people form an LLC expecting a tax break, but for most single-owner side hustles the tax result is the same.
Income tax
Both structures, by default, report profit on Schedule C, and the profit is taxed at your personal income tax rates.
Both sole proprietorships and single-member LLCs get pass-through taxation by default. The business itself pays no federal income tax; profit flows through to your personal tax return on Schedule C of Form 1040. A single-member LLC is treated as a “disregarded entity” for federal income tax, so it usually does not file separate business tax filings. A multi-member LLC is taxed as a partnership by default and files Form 1065, giving each owner a Schedule K-1.
Self-employment tax
The IRS requires you to pay self-employment tax if your net earnings from self-employment are $400 or more. The rate is 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare. This applies to sole proprietors and default single-member LLCs alike.
The S corporation election
An LLC can elect to be taxed as an S corporation. In that case, you pay yourself a reasonable salary through payroll, and some remaining profit may avoid self-employment tax. The IRS requires the salary to be reasonable for the work done. The election adds payroll, a separate business tax return and accounting costs, so it generally makes sense only at higher, steady profit levels. Talk to a tax professional before electing.
For a full overview of what to report and when, see our guide to side hustle taxes for beginners.
An LLC can also choose its tax status. Filing Form 2553 elects S corporation status, which can reduce self-employment tax once profits are high enough to justify paying yourself a reasonable salary through payroll. Filing Form 8832 can elect C corporation taxation, which taxes profit at the corporate level and again when distributed, rarely a fit for a side hustle. Either election brings separate business tax returns (Form 1120-S or 1120) and more bookkeeping, so talk to a tax professional first.
Liability: The Real Reason to Form an LLC
The main benefit of an LLC is liability protection. If the business is sued or cannot pay a debt, creditors generally can reach only business assets, not your personal property.
What an LLC does not protect
- Your own negligence: if you personally cause harm, you can still be personally liable.
- Personal guarantees: if you personally guarantee a loan or lease, you are on the hook.
- Commingled funds: if you mix business and personal money, a court may disregard the LLC, sometimes called piercing the corporate veil.
Insurance still matters
An LLC is not a substitute for insurance. General liability and professional liability policies cover claims, legal defense and damages in ways an LLC cannot. Many service businesses carry insurance whether or not they form an LLC.
Higher-risk side hustles
Activities with more risk to clients or the public often justify an LLC sooner. Examples include:
- Home repair, cleaning and handyman work
- Pet sitting and dog walking
- Food businesses
- Fitness coaching and event services
- Selling physical products, especially for children
Lower-risk activities, like online tutoring, writing or graphic design, may be fine as a sole proprietorship at first, with good contracts and insurance.
Formation Documents and Ongoing Compliance
A sole proprietorship needs no formation documents: you are in business as soon as you start, though you may still need a local business license and, if you use a name other than your own, a DBA filing. You keep complete control and there is no state filing to maintain.
An LLC is created by filing articles of organization (called a certificate of formation in some states) with your state, usually the secretary of state. Most owners also write an operating agreement, even for a single-member LLC, to document how the business is run. After that come ongoing compliance obligations, which vary by state:
- Annual or biennial reports and fees
- A registered agent with an address in the state
- Keeping business and personal money separate so the liability protection holds up
- Renewing local licenses and permits
Some owners also feel an LLC adds business credibility with clients and platforms, since “LLC” after the name signals a registered business. It is a minor factor compared with liability and cost, but it can matter for B2B freelancers.
Costs by State
LLC costs vary widely by state. Filing fees range from modest to several hundred dollars, and some states charge annual fees or taxes. California is a notable example: according to the California Franchise Tax Board, most LLCs doing business in the state owe an $800 annual LLC tax, with exceptions and changes over the years. Check your state’s secretary of state or business filing office for current fees before deciding.
Other possible costs include registered agent services, publication requirements in a few states and local business licenses, which apply to both structures.
Banking, EINs and Paperwork
Separate bank account
Keep business money separate under either structure. For an LLC, separation is essential to maintain liability protection. For a sole proprietorship, it makes bookkeeping and taxes far easier.
Employer Identification Number
An EIN is a federal tax ID number. The IRS issues EINs free online. Sole proprietors without employees can use their Social Security number, though many get an EIN to avoid sharing their SSN with clients. Banks typically ask for an EIN to open an LLC account.
Beneficial ownership reporting
Under the Corporate Transparency Act, many small companies were originally required to file beneficial ownership information reports with FinCEN. In March 2025, FinCEN issued a rule exempting U.S.-created companies and U.S. persons from this requirement. Rules in this area have changed several times, so check FinCEN’s site for current status.
Sole Proprietor vs LLC: How to Decide
Consider an LLC if:
- Your work carries real risk of injury, property damage or costly mistakes
- You have significant personal assets to protect
- Clients or platforms require it
- You plan to grow, hire or add partners
- Your income is steady and the state fees are small relative to profit
A sole proprietorship may be enough if:
- You are testing an idea
- Your income is small and the risk is low
- Your state’s LLC fees are high relative to your profit
- You carry insurance and use solid contracts
Three Example Scenarios
These simplified examples show how the decision often plays out. Your situation may differ.
The freelance writer
Maya writes blog posts for a few clients on weekends and earns a few thousand dollars a year. Her work carries little risk of injury or property damage, and her contracts limit liability for errors. She stays a sole proprietor, opens a separate checking account and gets a free EIN so she does not have to share her Social Security number on client forms. She plans to revisit the decision if her income grows or she signs larger clients.
The weekend handyman
Luis does small repairs in clients’ homes. A mistake could damage property or injure someone. He forms an LLC, buys general liability insurance and keeps all business money in a separate account. The combination of LLC and insurance gives him more protection than either alone.
The online product seller
Priya sells handmade candles online and at markets. Products that can cause burns carry some risk, and a market organizer asks vendors for proof of insurance. She forms an LLC once sales become steady, adds product liability coverage and checks her state’s rules on sales tax.
Common Mistakes to Avoid
- Forming an LLC and then mixing money. Paying personal bills from the business account weakens liability protection.
- Expecting automatic tax savings. Default LLC taxes match a sole proprietorship.
- Ignoring annual state filings. Missing reports can lead to penalties or the loss of good standing.
- Skipping insurance. An LLC does not pay claims.
- Paying for unnecessary add-ons. Online formation services often sell extras you can handle yourself, such as getting an EIN, which the IRS provides free.
How to Form an LLC
- Choose a name that meets your state’s rules and is not already taken.
- Pick a registered agent, which can be you if you have an address in the state, or a service.
- File articles of organization with your state and pay the fee.
- Create an operating agreement, even for a single-member LLC.
- Get an EIN from the IRS for free.
- Open a business bank account.
- Get required licenses and permits at the city, county and state level.
- Calendar annual filings so you do not miss state deadlines.
For more on structuring a business from home, see our guide to home-based business opportunities and our walkthrough on starting an online business.
Frequently Asked Questions
Do I need an LLC to start a side hustle?
No. You are a sole proprietor by default when you work alone without registering. An LLC adds liability protection but costs money and adds paperwork.
Does an LLC save on taxes?
Not by default. A single-member LLC is taxed like a sole proprietorship on Schedule C. Tax savings may come from an S corporation election at higher profit levels.
Can I switch from a sole proprietorship to an LLC later?
Yes. Many side hustlers start as sole proprietors and form an LLC as income and risk grow. You will need to update your bank account, contracts and tax details.
Is an LLC enough to protect me from lawsuits?
It helps but is not complete. You can still be liable for your own negligence and personal guarantees. Insurance is still important.
Do I need an EIN as a sole proprietor?
Not if you have no employees, but an EIN is free and lets you avoid sharing your Social Security number.
Does a single-member LLC file a separate tax return?
Usually not. By default, a single-member LLC reports its income and expenses on Schedule C with your personal tax return, the same as a sole proprietor. It files separately only if it elects S corporation or C corporation taxation.
Sole proprietor vs LLC: which is better for a side hustle?
For a low-risk side hustle just getting started, a sole proprietorship is often enough. An LLC vs a sole proprietorship becomes worth the cost when your liability risks rise, you sign larger contracts, or you hire help. Pair either choice with good insurance.
Sources
- U.S. Small Business Administration: Choose a business structure.
- IRS: Sole proprietorships; Single member limited liability companies; Self-employment tax; Apply for an EIN.
- California Franchise Tax Board: Limited liability company annual tax.
- FinCEN: Beneficial ownership information reporting updates (March 2025).
- IRS: Single member limited liability companies; LLC filing as a corporation or partnership (Forms 8832, 2553, 1065).