If you start preparing returns without forming a separate entity, you’re a sole proprietor by default. That’s the simplest option. It’s usually not the best one.
Sole Proprietorship
No formation documents. No state filings beyond a business license. You report income on Schedule C of your personal return. Simple and cheap.
The problem: no liability protection. If a client sues you for an error on their return, your personal assets are exposed. Your bank account, your car, your home equity. Everything is on the table.
LLC
A limited liability company creates a legal separation between you and your business. If the business gets sued, creditors can generally reach only the LLC’s assets, not your personal property. That protection isn’t absolute (courts can “pierce the veil” if you commingle funds or ignore formalities), but it’s a meaningful layer of protection.
For tax purposes, a single-member LLC is treated the same as a sole proprietorship by default. You still report on Schedule C. The difference is the legal structure around the business.
Formation costs vary by state. Texas is $300. Many states are under $150. You can file online with your Secretary of State in most cases.
When to Consider the S-Corp Election
Once your net self-employment income consistently exceeds $40,000 to $60,000 per year, talk to a tax advisor about electing S-Corp status for your LLC. This allows you to split your income between salary (subject to employment taxes) and distributions (not subject to employment taxes), potentially saving $5,000 to $15,000 or more per year in payroll taxes.
The S-Corp adds complexity: you’ll need to run payroll, file a separate business return (Form 1120-S), and pay yourself a reasonable salary. Below the $40,000 to $60,000 threshold, the savings typically don’t justify the added cost and paperwork.
The Recommendation
Form an LLC before your first client. The liability protection and professional credibility are worth the modest filing fee. Operate as a single-member LLC (taxed on Schedule C) for your first couple of seasons. Evaluate the S-Corp election once your income justifies it.
At MuseSpring, business formation support is included in the program. We help you form your LLC, get your EIN, and set up your business correctly from day one. Visit musespring.com.