Form an LLC to protect personal assets and gain tax flexibility, but expect higher costs, self-employment tax, and ongoing compliance. Keep reading for more!
You've been building your hustle for a while, your income is growing, and your client base is expanding. So, you've decided it's time to make your business official.
However, choosing a legal business structure is not a decision to take lightly. The wrong choice can create complexity and costs down the road.
Your business structure affects everything from how you are taxed and how disputes are resolved to how you raise capital.
The most common business structures include:
- Sole Proprietorship
- Limited Liability Company (LLC)
- Partnership
- Corporation
Among all business structures, the LLC is often the simplest and most popular choice for sole proprietors, small businesses, and startups.
Its biggest advantage is liability protection and flexibility. Its biggest drawback is the additional costs and compliance requirements as compared to a sole proprietor.
Key takeaways
An LLC separates your personal assets from most business debts and lawsuits, but that protection has limits.
Most LLCs are taxed as pass-through entities by default, which simplifies filing but does not automatically lower what you owe.
LLCs cost more to maintain than sole proprietorships, primarily due to state filing fees and annual reports.
An LLC tends to make more sense once you have a steady income, contracts, or anything worth protecting.
LLC Pros and Cons at a Glance
Advantage | Disadvantage | |
Liability | Personal assets are generally protected from business debts and lawsuits | Protection weakens if you mix personal and business money |
Taxes | Pass-through taxation by default, plus the option to elect S Corporation status later | Doesn't lower your tax bill automatically; self-employment tax still applies [1] |
Cost | Cheaper and simpler to run than a corporation | More expensive than a sole proprietorship |
Paperwork | Far fewer formalities than a corporation | Still requires state filings, fees, and a registered agent |
Credibility | Looks more established to clients, vendors, and banks | Doesn't replace contracts, licenses, or insurance |
Funding | Works well for most small businesses | Less attractive to venture capital investors than a C Corp |
What are The Pros of an LLC
1. Your Personal Assets Get a Layer of Protection
This is the reason most people form an LLC in the first place. As a sole proprietor, there's no legal line between you and your business. If a client sues the business or a debt goes unpaid, your personal bank account, car, or home can be on the hook. An LLC draws that line. The business becomes its own legal entity, so a claim against it is generally a claim against the company, not you.
For example, you run a small bakery, and a customer claims a product made them sick. With an LLC, that claim is directed at the business. Without one, it can be directed at you personally.
What to Remember:
The protection isn't unconditional. It can fall apart if you personally guarantee a loan, sign a contract in your own name instead of the LLC's, or blend your business and personal accounts. Treat the LLC like a separate entity, and the protection holds up. Treat it like a formality, and it won't.
2. Profits Pass Through to You, Not the Business
By default, an LLC doesn't pay federal income tax as a business. The profits flow through to the owners, who report them on their personal returns. A single-member LLC is taxed like a sole proprietorship by default, and a multi-member LLC is taxed like a partnership. Either way, you're avoiding the double taxation that hits traditional C corporations, where profits get taxed at the company level and again when they're paid out to shareholders.
That said, pass-through doesn't mean tax-free. You'll still owe income tax and self-employment tax on what the business earns.
3. You Can Choose How You're Taxed
An LLC is a legal structure, not a tax classification, which means it offers flexibility in how it's taxed. By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs as partnerships, but eligible LLCs can also elect S corporation or C corporation taxation. [2]
This flexibility can create tax-saving opportunities as your business grows. However, the right choice depends on your profits, compensation, and long-term goals. The wrong election can add unnecessary payroll, compliance, and filing requirements, so it's worth a conversation with a business formation specialist before making a change. [3] For further reading, check our LLC vs. S Corp and LLC vs. Corporation guides.
4. Ownership and Management Bend to Fit Your Business
An LLC can have one owner or fifty. It can be run by the owners directly (member-managed) or by appointed managers (manager-managed). A single freelancer, a two-person creative studio, and a multi-partner consulting firm can all use the same structure and shape it differently.
The catch is that flexibility without documentation creates confusion. If you have more than one owner, a written operating agreement that covers who owns what, how profits are split, and what happens if someone leaves becomes important.
Note: Although an ownership agreement is not legally required, it is the smartest decision to have one to make things easier during any conflict of ownership or profit distribution.
5. Fewer Formalities Than a Corporation
Corporations come with a real administrative load, like boards, bylaws, shareholder meetings, and stock records. LLCs mostly skip that. You'll still file annual reports, pay state fees, and keep a registered agent on file, but you're not running a miniature corporate bureaucracy to stay compliant. For a solo owner or small team, an LLC is the better structure without many headaches.
Also Read: What Is a C Corporation?
6. You Look More Established
A signed proposal from "Foster Creative LLC" reads differently from one in your own name. Clients, landlords, banks, and payment processors tend to take a registered business more seriously than an individual, and an LLC is one of the simplest ways to get that registered status.
It's not a substitute for good work, clear contracts, and proper licensing, but it does remove one small reason for a client or lender to hesitate.
What are The Cons of an LLC
1. It Costs More Than Staying a Sole Proprietor
Forming an LLC means a state filing fee upfront, and most states add ongoing costs after that, like annual report fees, registered agent fees, and, in some states, a franchise tax.
For example, California charges LLCs a minimum $800 annual franchise tax whether the business turns a profit or not. Before you file, look up what your specific state charges every year, not just what it charges to start.
2. Self-Employment Tax Doesn't Go Away
This is the part people misunderstand most. By default, LLC profits are subject to 15.3% self-employment tax covering Social Security and Medicare, on top of regular income tax. Forming an LLC doesn't change that math on its own.
The Internal Revenue Service (IRS) also requires you to file a Schedule SE and pay self-employment tax once your net earnings from self-employment hit $400 in a year. This threshold applies whether you're an LLC, a sole proprietor, or anything else.
Some LLC owners reduce this tax burden by electing S corp status once profits are high and steady enough, but that comes with its own payroll obligations and isn't the right move for every business.
If this brings questions about S Corporations to your mind, read the complete guide What Is an S Corp? definition, benefits & 2026 tax rules for more details.
3. Staying Compliant Is an Ongoing Job, Not a One-Time Task
Forming the LLC is the easy part. Most states require you to keep it in good standing through annual or biennial reports, fee payments, license renewals, and updates whenever ownership or address details change. If you miss these requirements, a state can impose fines or administratively dissolve your LLC.
4. The Liability Shield Has Real Limits
An LLC doesn't automatically protect you in every situation. Courts can remove that protection if you fail to treat the business as separate by:
- Mixing personal and business funds
- Keeping poor records
- Undercapitalizing the company
- Using the LLC for personal expenses
Also, personal guarantees on loans or leases remain your responsibility, regardless of the LLC structure.
5. It's a Tougher Sell to Investors
If raising venture capital is part of your plan, an LLC isn't the natural fit. Investors generally prefer C corporations because they can issue stock, create different share classes, and slot cleanly into a funding round. LLC membership interests are harder to structure that way.
For most small businesses, this isn't an immediate concern. But if outside investment is on your roadmap, it's worth comparing structures before you file. Read the C Corp vs. S Corp vs. LLC guide to go deeper on this.
6. Changing Ownership Takes More Work
Selling shares in a corporation is simple. Transferring membership interest in an LLC usually isn't. It can require approval from other members, updates to the operating agreement, and sometimes new state filings. If you ever plan to add a partner, buy someone out, or bring in family, a solid operating agreement now saves a lot of friction later.
At What Income is an LLC Right for You
There's no universal income number or business size that makes an LLC "worth it." It comes down to how much you have to protect and how serious the business has become.
An LLC likely makes sense if:
- You have regular paying clients or customers
- You're signing contracts or service agreements
- You're selling physical or digital products
- You want your personal and business finances cleanly separated
- You have any real liability exposure, a product or a service that could go wrong or cause harm
It might be fine to wait if:
- You're still testing whether the idea works
- There's little to no income yet
- The risk involved is genuinely low
- You're not ready to take on state filing fees or annual paperwork
The Bottom Line
An LLC trades a bit of cost and paperwork for a real layer of protection and flexibility. For a business with steady income, contracts, or anything worth protecting, that trade is usually worth making. For an idea that's still untested, it can wait.
When you're ready to file, Swyft Filings can handle the state paperwork so you can get back to running the business.
Disclaimer: This article is for general information only and isn't legal or tax advice.
Bibliography
[1] IRS. Self-Employment Tax (Social Security and Medicare Taxes). Accessed on June 8, 2026
[2]U.S. Small Business Administration. Choose a Business Structure. Accessed on June 8, 2026
[3] Internal Revenue Service. S Corporations. Accessed on June 8, 2026
[4]IRS. Form 1099-K Reporting Thresholds. Accessed on June 8, 2026
