Free Guide · Business Structure

LLC vs Sole Proprietorship.
Which one is right for you?

The short answer: if you’re earning real money and have any client-facing risk, form an LLC. But here’s the full picture — with a clear decision framework at the end.

This guide is for educational purposes only. Consult a CPA or attorney for advice specific to your situation.

Side-by-side comparison

10 dimensions, head to head.

DIMENSION
LLC
Sole Prop
Personal liability protection
Yes — your personal assets are separate
No — you are personally liable
Ease of setup
File Articles of Organization ($50–$500 by state)
Start immediately — no paperwork
Annual fees / maintenance
Annual report fees ($0–$800 by state)
None
Federal income tax (default)
Pass-through (same as sole prop, by default)
Pass-through on Schedule C
Self-employment tax
Same as sole prop (unless S-Corp election)
15.3% on net profit
S-Corp election available
Yes — can reduce SE tax at higher incomes
No
Business bank account
Required to maintain liability protection
Recommended but not legally required
Credibility with clients
Higher — “LLC” signals established business
Lower in some industries
Ability to add partners
Yes — multi-member LLC
No — must restructure
Complexity
More paperwork, separate books required
Minimal
Decision framework

When to choose each.

Choose an LLC when…
  • ✓You work with clients who could sue you (contractors, consultants, creatives, healthcare)
  • ✓You want to bring on a partner or investor later
  • ✓Your net profit exceeds ~$80K/yr (S-Corp election can save thousands in SE tax)
  • ✓You want to build a business that sells or scales
  • ✓Your clients expect a more established entity
Sole prop is fine when…
  • →You’re just starting and want to test the business model
  • →Your income is low and the filing fees outweigh the benefits
  • →You work in a very low-risk industry with no client liability exposure
  • →You want to form an LLC later but need to start billing now
The practical default

Most service business owners should form an LLC before billing their first client. The filing cost is $50–$300 in most states. The liability protection is permanent. The SE-tax savings via S-Corp election at higher incomes alone can pay for the cost of formation in a single quarter.

Once you’ve formed your entity

FIRMA handles the books from day one.

Set up your chart of accounts, connect your bank account, and start tracking revenue and expenses from your first invoice.

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