LLC or Sole Proprietor? Choosing the Right Business Structure
- Jacobs Branding Graphics & Website Designs
- Jul 3
- 6 min read
Deciding between forming an LLC or remaining a sole proprietor is a significant decision for freelancers, creative entrepreneurs, and small business owners. If you've been operating informally but now want to protect your assets, minimize taxes, and elevate your credibility, this guide is for you.
Key Takeaways
Understand the differences between LLCs and sole proprietorships.
Weigh the pros and cons relevant to creative professionals.
Clearly see the cost, tax implications, and paperwork needed to file.
Follow an actionable guide to transition to an LLC.
Use a checklist to confidently choose your business structure.
Table of Contents
The Real Difference (LLC vs Sole Prop)
Pros & Cons for Small Business Owners & Freelancers
Asset Protection: Do Design Shops Really Need an LLC?
Liability vs. Taxes: Where the Numbers Get Real
Filing Costs: Example—Virginia (and How to Ballpark Your State)
Tax Advantages: LLC Perks for Solo Marketers
Step-by-Step: Upgrading from Sole Prop to LLC
❓The Real Difference (LLC vs Sole Prop)
An LLC, or Limited Liability Company, separates your personal and business assets, offering liability protection. In contrast, a sole proprietorship is simpler but doesn't separate your personal assets from your business liabilities.
Sole Proprietorship | LLC | |
Liability | Unlimited | Limited |
Taxes | Self-employment taxes on all profits | Flexible (self-employment or pass-through) |
Setup Ease | Very simple | Moderate paperwork |
Pros & Cons for Small Business Owners & Freelancers
Pros and Cons at a glance
Asset protection
Increased business credibility
Potential tax advantages
More paperwork
Higher startup costs
Ongoing annual maintenance
When considering forming an LLC, small business owners and freelancers should carefully weigh the pros and cons. One significant advantage of an LLC is asset protection. By separating your personal and business assets, your home, savings, and personal property remain protected from business-related lawsuits or debts. Additionally, operating under an LLC often enhances your business credibility. Clients, vendors, and financial institutions typically view LLCs as more established and reliable, opening doors to better opportunities and contracts. There's also potential for meaningful tax advantages, such as pass-through taxation, where business profits are taxed at personal rates, and the ability to choose an S-Corp election for additional tax savings as your income grows.
However, forming an LLC isn't without challenges. Compared to a sole proprietorship, an LLC requires significantly more paperwork, both initially and annually, including state filings, renewals, and maintaining proper records. There are also higher startup costs, including filing fees and possibly registered agent services. Ongoing annual maintenance, like filing annual reports and paying associated state fees, adds another layer of administrative responsibility. In contrast, a sole proprietorship is simpler, cheaper initially, and easier to manage day-to-day, though it leaves your personal assets exposed to business liabilities. Ultimately, choosing the right structure depends on balancing your need for simplicity and low initial costs against your desire for asset protection and professional credibility.
🔐Asset Protection: Do Design Shops Really Need an LLC?
For creative businesses like graphic design, an LLC significantly reduces personal financial risk. Without an LLC, if a client lawsuit or debt arises, your personal assets—like your home or savings—could be at risk.
Liability vs. Taxes: Where the Numbers Get Real
Let’s get real. These examples are inspired by businesses right here in Fredericksburg, VA:
An LLC provides liability protection that shields personal assets. Sole proprietors, however, directly bear business debts. On taxes, LLCs offer flexibility, potentially reducing self-employment tax compared to sole proprietorships.
💰Filing Costs: Example—Virginia (and How to Ballpark Your State)
In Virginia, LLC formation typically includes:
Filing fees (~$100)
Annual registration (~$50)
Optional registered agent services (~$100/year)
These costs can vary by state, so research your specific requirements. To ballpark your own state’s costs, start by visiting your Secretary of State (or equivalent) website and noting the one-time formation fee and any recurring report or franchise fees; across the country, these typically range from $50–$250 to form and $0–$150 per year to maintain. Don’t forget to factor in whether you’ll need a registered agent (often $50–$200/year) and any expedited‐filing or certified‐copy fees if timing is tight.
States like Colorado (formation $50, no annual fee), Florida (formation $125, $138.75 biennial report), Oregon (formation $100, $100 annual report) and Michigan (formation $50, $25 annual statement) tend to sit at the lower end of the spectrum, while Texas ($300 formation, no annual fee but a marginal “franchise tax” threshold) can still work out as budget-friendly for many small operators.
Ultimately, a quick review of your state’s online filing portal will give you the most accurate numbers—and a simple spreadsheet comparison will help you see which jurisdiction offers the best value for your budget and business needs.
Tax Advantages: LLC Perks for Solo Marketers
An LLC allows for pass-through taxation, where profits are taxed at the owner's personal tax rate. Marketing consultants may also elect S-Corp status for additional savings, especially when business income grows significantly.
Example: On $90,000 net profit, electing S-Corp status could save thousands of dollars annually.
📋Step-by-Step: Upgrading from Sole Prop to LLC
Choose your business name.
File Articles of Organization with your state.
Obtain an EIN from the IRS.
Set up a separate business bank account.
Update contracts and marketing materials to reflect the LLC.
Paperwork, Fees & Timelines
Articles of Organization (state filing)
EIN (Employer Identification Number) IRS form SS-4
Operating Agreement (internal document)
Completing these correctly avoids delays and ensures a smooth setup. The timeline is typically 1-4 weeks, with minimal downtime if planned carefully.
Remote-First? Best Structure in 2025 and Beyond
Considering remote work, an LLC offers the most flexibility for scaling and handling multi-state clientele. Explore advanced options like Series LLC or S-Corp elections for optimal structure in the evolving digital workspace. Series LLC is good to use if managing multiple ventures. Single-Member LLC with S-Corp election is potentially the best for tax savings.
Action Checklist
Small Business Checklist: Choosing LLC or Sole Proprietorship
Do you need liability protection?
Do you prefer simpler taxes?
Is business credibility crucial?
Can you handle additional paperwork?
Are tax savings significant for your income level?
Do you plan on having significant business growth?
Are your assets worth protecting?
Use this checklist to make an informed decision tailored to your business goals. If you answered mostly “yes”, an LLC is likely your best choice.
Choosing between an LLC or sole proprietorship is essential for your business growth and security. Weigh these factors carefully, utilize the provided checklist, and make a confident, informed decision to protect your assets, optimize taxes, and enhance your business credibility.
Whichever path you choose, having a professional brand presence can set you apart from day one. Need a logo or website that looks as official as your new business structure? Let’s chat!
✨FAQs
What happens to existing contracts when I switch to an LLC?
When you switch from a sole proprietorship to an LLC, your existing contracts don't automatically transfer to your new LLC. You'll typically need to formally assign or update contracts, ensuring each client or vendor acknowledges and agrees to the change. Communicating clearly with your clients and updating contracts promptly helps maintain smooth business operations during this transition.
Can one-person LLCs file as S-Corp?
Yes, one-person LLCs (single-member LLCs) can elect to be taxed as an S-Corporation by filing Form 2553 with the IRS. This election can offer significant tax advantages, including potential savings on self-employment taxes. However, it also comes with additional administrative responsibilities, such as payroll requirements and more structured record-keeping.
Do I still need business insurance if I form an LLC?
An LLC does help shield your personal assets from many business liabilities, but it isn’t a substitute for insurance. Even as an LLC you’ll still want a general liability policy to cover third-party injuries or property damage, and—depending on your work—professional liability (errors & omissions) insurance to protect against mistakes or oversights in your services. If you have employees, you’ll also need workers’ compensation, and if you own or lease space or equipment, property or business-owners policies can cover theft, fire, or equipment breakdown. In short: an LLC limits your personal exposure, but insurance fills in the gaps that your operating agreement and state law leave open.
How do LLC taxes change if I hire subcontractors?
Even after you form an LLC, bringing on subcontractors doesn’t fundamentally change your pass-through tax treatment—you’ll still report all business income and expenses on your personal return (or partnership/S-corp return, if elected). What does change is your reporting and withholding obligations: you don’t withhold payroll taxes for contractors, but you must issue Form 1099-NEC for each subcontractor you pay $600 or more in a calendar year. Those subcontractor payments remain fully deductible business expenses, which can reduce your taxable profit (and thus your self-employment tax), but they’re not subject to the employer portion of Social Security or Medicare.
Is a DBA the same as an LLC?
No—filing a DBA (“Doing Business As”) simply lets you operate under a trade name; it doesn’t create a separate legal entity or protect your personal assets. An LLC (Limited Liability Company) actually forms a distinct business entity in the eyes of the state, so your personal belongings are generally shielded from business debts and lawsuits. You can, however, register a DBA for your LLC if you want to do business under a different name than your LLC’s official name.
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