Sole Proprietorship vs. LLC for Side Hustlers: Pros and Cons

You’ve finally launched your side hustle. 

Maybe it’s freelance writing, selling handmade products, or building an app on weekends. But now you’re wondering … should you stick with a simple sole proprietorship … or take the next step and form an LLC?

This question often trips up many early entrepreneurs. On one hand, you don’t want to overcomplicate things too early. But you also don’t want to jeopardize your personal assets. 

The wrong choice could leave you overexposed to risk or buried in admin before you’re making any money.

Let’s take a closer look at the real pros and cons of a sole proprietorship vs an LLC so you can make a decision that fits your business income, risk level, and future goals.

(Read the quick summary in our TL;DR section below if you’re in a rush.)

TL;DR:

• A sole proprietorship is easy to set up but offers no personal liability protection, making it suitable for low-risk side hustles.
• An LLC protects personal assets and offers tax flexibility, making it ideal for higher-risk businesses or those looking to scale.
• Consider booking an appointment with a tax advisor to understand the tax implications of both options.
• Start simple with a sole proprietorship if you’re testing the waters, but be ready to transition to an LLC as your business grows.
• Ensure proper compliance and business insurance regardless of your structure to minimize risks.

Liability: What happens when something goes wrong?

Here’s what to consider when you’re thinking about liabilities. 

Sole Proprietorship: You are the business

With a sole proprietorship, you and your business are considered a single legal entity. If a client sues you or your business accrues debt, your personal assets are at risk. If garnished by a court order, this includes your savings, house, car, and even your full-time personal income.

This is especially risky if your side hustle involves:

• Anything with public exposure (events, food sales, fitness).
• Financial advice or writing (you can be liable for claims).
• Client interactions (consulting, coaching).
• Physical products.

LLC: The business is its own legal entity

With an LLC, you typically get limited liability protection.

Your personal assets are generally protected if the business is sued or falls into debt. (As long as you follow the legal formalities, like not mixing personal and business finances.)

Deep insights to consider

Many side hustlers think, “It’s just a small business; nothing bad will happen.” That’s exactly why many are underinsured and under-protected when something does. LLCs are a cheap insurance policy against the worst-case scenario. 

If you’re still testing the waters, you can always start with a sole proprietorship to avoid strict admin details. Once you’re sure that your business is productive and a serious venture, you can transition to an LLC.

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Taxes: How much will you actually pay?

Here’s what to keep in mind when you’re thinking about taxes.

Sole Proprietorship: Pass-through taxation (simple but potentially costly)

With a sole proprietorship, you report income and business expenses on your personal tax return. You’ll usually owe self-employment tax on all profits, even if you leave the money in the business. 

LLC: More flexible tax treatment

LLCs are taxed like sole proprietorships (single-member) or partnerships (multi-member). 

However, you can elect S-Corp status if you meet a specific income threshold. This allows you to split your income between salary (subject to payroll tax) and owner distributions (not subject to self-employment tax).

Deep insights to consider

The S-Corp election can save you thousands in taxes, but only if your business earns enough to justify the added payroll and bookkeeping complexity. 

For most early-stage side hustlers, that line is between $30K and $50K in net profit annually. Below that, the cost of running an S-Corp may outweigh the tax benefits. Meet with a tax advisor to get the full details.

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Administration: How much time and money does it take to stay compliant?

Keep these admin details in mind when comparing both legal structures.

Sole Proprietorship: No formal setup or ongoing requirements

With a sole proprietorship, you can start immediately. No state filing. No annual reports. You can use your own Social Security Number for taxes. Just get any necessary business licenses and go. (These can vary by state.)

LLC: Initial setup + ongoing maintenance

For an LLC, you may need to file Articles of Organization, pay a filing fee, publish a notice (in some states), and file annual reports. 

Depending on your business activities, you’ll also need to maintain a separate bank account and possibly register for payroll or collect sales tax.

Deep insights to consider

If you treat your side hustle casually, you may resent the structure of an LLC. But if you want to treat it like a business from the start, those administrative steps force you to get organized early. (A huge benefit when the money starts flowing.)

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How to decide between a sole proprietorship vs. LLC (a checklist)

Still can’t decide given the comparisons so far? Use our handy checklist.

1. Evaluate your risk: If your business involves any risk of lawsuits or liability, such as offering services to clients or selling products, consider forming an LLC to protect your personal assets. Low-risk businesses may be fine as sole proprietorships in the beginning stages.
2. Research tax benefits: Understand the tax structure for both options. If you’re forecasting substantial business profits or want business partners, an LLC might offer tax savings. (Through deductions and the possibility of electing S-Corp status to reduce self-employment taxes.)
3. Start simple: If you’re testing the waters, start with a sole proprietorship. It’s easy to set up and doesn’t require a lot of paperwork. This lets you experiment with minimal hassle.
4. Prepare for growth: If you plan to scale quickly or want to take on investors, an LLC is a better choice. It offers more room for growth and flexibility in the ownership structure.

5. Consult with a tax advisor: Meet with a tax expert to understand how your choice will impact your taxes. They’ll help you determine if you qualify for LLC tax perks or if you should stick with a sole proprietorship for now.

6. File your paperwork: If you opt for an LLC, make sure to file the necessary articles of organization with your state if required. This officially establishes your LLC and separates your personal and business liabilities.
7. Set up business insurance: Regardless of your structure, consider getting business insurance for liability protection. Even an LLC can’t entirely shield you from all risks.

8. Consider long-term plans: Think ahead. If you plan to hire and educate employees or have partners, an LLC gives you more flexibility in these areas. A sole proprietorship limits you to operating alone (you’re the sole owner).

9. Track your income: If your business starts generating significant revenue, revisit your business structure. As you earn more, the self-employment taxes for a sole proprietorship may become burdensome. And an LLC or S-Corp status might become more advantageous.
10. Meet compliance requirements: If you set up an LLC, stay up-to-date with state filing requirements and fees. Some states require annual reports, which can result in penalties if not filed properly.

If you’re still not sure, see our final recommendations below. (But of course, ALWAYS consult with a tax advisor or business advisor.)

Final recommendation for side hustlers

Here’s a final quick run-through to help with your business decision.

Start as a sole proprietorship if:

• There’s little to no liability (for instance, you sell digital products or offer low-touch freelancing).
• You plan to keep it as a small, casual gig (as a single owner).
• You’re just testing the waters.
• Your income is minimal.

Form an LLC if:

• You want to explore S-Corp tax savings in the next year or two.
• You want to build a brand or quit your day job eventually.
• You have any liability exposure.
• You’re generating steady income.

Take your time to thoroughly vet both options. 

And if you’re looking for even more expert tips for business owners, check out our free resources. Or sign up for The Start newsletter for quick tips delivered straight to your inbox.

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Corporations Today

Fast, friendly, dependable service for incorporation filings in any state, specializing in Limited Liability Companies (LLCs), C-Corporations, and S-Corporations. We also decode the complexities of the Corporate Transparency Act, providing vital services to keep your business compliant and in good standing.

Start Today

We earn a commission if you make a purchase, at no additional cost to you.

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