Setup and Cost
Sole Prop: Free. You are automatically a sole proprietor the moment you earn 1099 income. LLC: State filing fee ($50–$500 depending on state), plus a possible annual report fee ($0–$800/year, with California at the high end).
Liability Protection
Sole Prop: None. A lawsuit against your business is a lawsuit against you personally. LLC: Strong. Your personal assets are generally shielded from business debts and lawsuits (as long as you keep finances separate).
Taxes (This Surprises People)
Sole Prop: Report on Schedule C, pay 15.3% SE tax plus income tax on net profit. Single-Member LLC (default): Identical. Same Schedule C, same SE tax. Forming an LLC does not change your taxes unless you elect S-corp status. LLC with S-corp election: Can save thousands once profit exceeds ~$50,000/year by paying yourself a "reasonable salary" and taking the rest as distributions not subject to SE tax.
Paperwork and Ongoing Compliance
Sole Prop: Zero business paperwork beyond your tax return. LLC: Articles of Organization at formation, an Operating Agreement (recommended), annual reports in most states, potential franchise tax, and federal Beneficial Ownership Information (BOI) reporting.
Banking and Credit
Sole Prop: Uses your personal SSN for everything. Business credit is tied to your personal credit. LLC: Uses an EIN. Can build business credit separate from your personal credit — useful for larger loans and supplier accounts.
The Bottom Line
If your work carries real liability risk (visiting client property, handling client belongings, giving professional advice) OR your profit is approaching $50,000, an LLC pays for itself. If you are a solo creator or driver earning under $20,000 with no client-facing risk, staying a sole proprietor is fine — for now.