It does not lower your taxes. It does protect your house — if you maintain it. The unsold version of the first business decision.
“Should I form an LLC?” is usually the first question a new business owner asks — and most of the answers online are written by companies that sell LLC formations. Here is the version with no formation package to sell: what an LLC actually does, what it costs, and the tax myth that needs to die.
A single-member LLC is a “disregarded entity” — the IRS literally disregards it. You file the same Schedule C, pay the same income tax, and pay the same 15.3% self-employment tax as a sole proprietor, to the penny. Anyone who tells you forming an LLC will “save you money on taxes” is either confused or selling something. (The tax savings people have heard about come from an S-Corp election — a separate step available to LLCs and worth its own math. Run yours in the S-Corp savings calculator.)
Liability separation. If the business is sued or can’t pay its debts, a properly maintained LLC keeps the claim against the business’s assets — not your house, savings, or future wages. “Properly maintained” is the load-bearing phrase: a separate bank account, contracts signed in the LLC’s name, and no commingling. Run personal groceries through the business account and a court can pierce the veil, making the LLC worthless exactly when you need it.
It also does not protect you from your own malpractice or negligence — nothing does except insurance. The LLC shields you from the business’s obligations; it doesn’t shield the business from you.
State filing fees run roughly $50–$500 to form, plus annual report fees in most states. The outlier worth naming: California charges every LLC an $800 minimum franchise tax every year, profitable or not. A few states (NY’s publication requirement, for one) add real friction. There is no federal fee and no extra federal tax return for a single-member LLC.
Form the LLC if customers or the public physically interact with your work (trades, food, fitness, events), you have employees or subs, you sign leases or carry debt, you have meaningful personal assets to protect, or clients require it to issue contracts.
Skip it (for now) if you are a low-risk solo service business — writing, design, consulting from a laptop — with thin margins and no assets at stake. Good professional liability insurance at a few hundred dollars a year often buys more real protection than an $800 California LLC. You can always form one later; the upgrade is paperwork, not surgery.
Open a separate business bank account and run every business dollar through it. It is what makes an LLC’s shield real — and for a sole proprietor it is what makes the books, the deductions, and any future entity change painless. The bookkeeping basics guide starts there.
The structures are a ladder, not a fork: sole proprietor → LLC → LLC taxed as S-Corp. Each rung adds protection or tax efficiency and also adds cost and obligation. Most businesses should climb when the numbers say so — liability exposure for the first rung, the calculator math (usually somewhere past $60–80k of steady profit) for the second — and not before.
Foad is a federally licensed Enrolled Agent who writes about tax and bookkeeping for small businesses.