You started selling your services last year and money is starting to come in. Now your accountant is asking whether you have an LLC, your bank wants a "business entity" on the new account, and a friend warned you that without one your house is on the line. Choosing between staying a sole proprietor and forming an LLC sounds like a tax question, but it's really a question about how much risk and complexity you're ready to manage.

Why This Matters

  • If you operate as a sole proprietor and someone sues your business, your personal assets — savings, car, home equity — can be on the table.
  • Most business bank accounts, payment processors, and net-30 vendors will ask for a registered entity name and EIN before they'll work with you.
  • Forming an LLC the wrong way (no operating agreement, mixed personal and business funds) can give you legal paperwork without actually protecting you.
  • Some clients — especially anyone in healthcare, government, or larger corporate procurement — quietly filter out vendors who aren't registered entities.
  • Switching later is doable, but you'll redo contracts, payment processors, websites, and tax filings — so the cheaper time to decide is now.

What Actually Works

Start by naming your real exposure. Before you file anything, write down the worst plausible thing a customer, vendor, or contractor could sue you over. A house cleaner working alone has different exposure than someone running a kids' tumbling class or selling food. If your honest answer is "someone could get physically hurt" or "I sign contracts over $10K," lean toward an LLC. If you're a freelance writer with one or two regular clients, sole proprietor with good insurance is often defensible for now.

Form the LLC in the state where you actually do business. You'll see online ads pushing Wyoming or Delaware LLCs to small business owners. For a local service business, that almost always creates more paperwork — foreign entity registration, two annual reports, two registered agents — without saving any tax. File in your home state through the Secretary of State website yourself for a flat filing fee. You do not need a $300 service to do it.

Set up the boring infrastructure on day one. An LLC only protects you if you treat it like a separate thing. That means a dedicated business bank account, a written operating agreement (even for a single-member LLC), and never paying personal expenses out of the business account. Get an EIN from the IRS — it's free, takes ten minutes online, and lets you stop using your Social Security number on every W-9.

Pair the entity with insurance, not instead of it. An LLC is a wall around personal assets, not a force field. Add a general liability policy in the $400–$800 per year range and, if you give advice or specialized services, a professional liability policy. The combination of LLC plus insurance is what most lenders, landlords, and corporate clients are actually checking for.

Is This Right for You?

Form an LLC now if you sign client contracts, hire subcontractors, work in a customer's home, sell physical products, host events, or already make more than your day-job salary. The cost is modest — usually under $200 to file plus around $200 a year for a registered agent if you don't want your home address public — and the protection is real as long as you keep the books clean.

Stay a sole proprietor a little longer if you're in your first ninety days, testing whether the business actually works, and your only "contracts" are simple invoices for low-risk services. Use that time to register a DBA so you can deposit checks made out to your business name, get an EIN, open a separate checking account, and buy basic liability insurance. When revenue or risk steps up, you can file the LLC in an afternoon.

Frequently Asked Questions

Will an LLC save me money on taxes?

By itself, no. A single-member LLC is taxed exactly like a sole proprietor by default — same Schedule C, same self-employment tax. Tax savings come later, when profits are high enough to justify electing S-corp status, usually somewhere around $60K to $80K in net profit after expenses. Talk to a CPA before making that election.

How much does it actually cost to keep an LLC?

In most states you'll pay a one-time filing fee of $100 to $300 and an annual report fee of $20 to $200. Add a registered agent service if you don't want your home address on public record. Total ongoing cost is usually under $400 a year — less than what a single liability lawsuit deposition would cost.

Do I need a lawyer to form one?

For a simple single-member LLC, no — the state filing portal walks you through it. Where a lawyer earns their fee is the operating agreement, especially if you have a co-founder, investors, or family members on the books. Spend $300 to $600 once on a properly drafted agreement and you'll avoid the most common ownership disputes.

Choosing an entity is not a one-time legal puzzle — it's a decision you'll revisit as your revenue and risk grow. Whatever you decide today, write down why; your future self and your CPA will thank you, and the LaunchWakeForest community is full of operators a year ahead of you who can tell you what they wish they'd done differently. Pick your path this week, then get back to building.