Short answer: For most side hustles, starting as a sole proprietor is fine; if you use your own name, there's nothing to register. An LLC usually shields personal assets but doesn't change your federal taxes by default. Keeping one costs from nothing (most small Texas LLCs) to $800 a year (California). Form one when the risk or money justifies it.
We built a business-formation site, and we're telling you this anyway. A lot of people form an LLC in week one because it feels like the "real" first step. Usually it isn't.
What is a sole proprietorship, really?
It's what you are by default when you start selling something on your own. The SBA's description: if you do business under your legal name, "you won't need to register anywhere." You can still use a trade name (a DBA) if you want one; the rules for registering it depend on your state or county. Depending on your city and industry, you may need a local business license, but you'd need that as an LLC too.
The catch is liability. As a sole proprietor, the SBA says, "you can be held personally liable for the debts and obligations of the business."
Does an LLC save you taxes?
Not by default. The IRS treats a single-member LLC as a "disregarded entity": your business income goes on Schedule C of your personal return, the same form a sole proprietor uses. You also pay self-employment tax the same way a sole proprietor does. That's 15.3% for Social Security and Medicare, once your net earnings from self-employment reach $400.
An LLC can elect different tax treatment later, and at some profit level that can be worth a conversation with a CPA. But forming an LLC doesn't lower your taxes on day one.
What does an LLC actually protect?
The SBA says an LLC protects you from personal liability "in most instances." In plain terms: if the business owes money or gets sued, it's generally the LLC's assets on the line, not your house or savings.
What it generally doesn't protect:
- Anything you personally guarantee. Many leases and small-business loans ask the owner to sign personally.
- Your own mistakes. If you personally cause harm, the LLC usually doesn't stand between you and that claim.
- Sloppy separation. Mixing personal and business money can weaken the protection you formed the LLC to get.
For a lot of side hustles, a good insurance policy covers more real-world risk than an LLC does. Often the right answer is both, eventually.
What does an LLC cost each year?
It depends heavily on your state. Three real examples:
- Texas: $300 to file the Certificate of Formation. After that, $0 a year in franchise tax as long as revenue stays under $2.65 million. You file a free Public Information Report each May 15.
- Arizona: $50 to file. Arizona doesn't require LLCs to file annual reports. You may need to publish a newspaper notice, unless your statutory agent is in Maricopa or Pima County.
- California: $70 to file, plus a $20 Statement of Information every two years, plus an $800 annual tax every year, even with no income. For first taxable years starting in 2027 through 2029, year one drops to $400. Over five years, that's roughly $3,700 to $4,100 in state costs before you've earned a dollar.
Every state is in our LLC cost by state table, with the official source for each number.
When is it genuinely fine to wait?
Waiting makes sense when most of these are true:
- You're still testing the idea and revenue is small or zero.
- The work is low-risk: design, writing, tutoring, digital products, consulting.
- No one else is involved: no partners, no employees, no leases.
- Nobody is asking for an LLC: no client or platform requires one.
- Your state charges a lot just to exist. In California, an LLC costs at least $400–$800 a year whether or not you make money.
Our rule of thumb: don't think about filing until January of the year after you get moving, unless there's a pressing reason. Starting as a sole proprietor carries no penalty, and you can switch whenever you're ready.
When is it time to switch?
- Someone else's money or name is involved: a partner, an investor, or a co-owner.
- You're hiring.
- You're signing something big: a lease, a loan or a contract you'd rather the business sign.
- The work carries physical risk: customers on your premises, products people eat or use, or driving for work.
- A client or platform requires it.
- Profit is steady enough that it's worth asking a CPA about tax elections.
Switching is straightforward. You form the LLC, get an EIN if you need one, open a business bank account and move your contracts and payments over. Nothing you did as a sole proprietor is wasted.
Your next step
See your free roadmap, no account needed. It puts formation where it belongs in your sequence, which for many side hustles isn't step one. When you're ready, our state guides cover California, Texas, Arizona and every other state.
Sources: SBA: Choose a business structure · IRS: Single member limited liability companies · IRS: Self-employment tax · Texas SOS Form 205 · Texas Comptroller: Franchise Tax · ACC Articles of Organization instructions · ACC Business Services FAQs · CA Secretary of State LLC fees · FTB: Limited liability company · FTB: What's New with Tax Forms. This is general information, not legal or tax advice.