Maybe 🤔

At some point, every creator who starts making money asks the same question. Do I need to form an LLC or should I just stick with being a sole proprietor?

The answer is not as simple as “yes” or “no.” It depends on how much you make, what kind of work you do, and how much personal risk you are willing to carry.

What an LLC Actually Does

An LLC creates a legal wall between you and your business. If you get sued or your business goes into debt, the LLC is designed to protect your personal assets like your house, car, or savings. That protection is not perfect. Courts can break through it if you mix personal and business money or do something fraudulent. But it is still a strong layer of protection that sole proprietorship does not give you.

An LLC also looks more professional. Some clients only sing contracts with LLCs. Having an EIN instead of giving out your Social Security number is another perk. And with an LLC you can open business credit in your company’s name instead of yours.

Taxes as a Sole Proprietor vs. LLC

By default, both sole proprietors and single member LLCs are taxed the same way. Income passes through to your personal tax return and you pay the same self employment tax of 15.3% on your net earnings.

The real tax advantage comes when you elect to have your LLC taxed as an S corporation. At that point you can split your earnings between a salary and distributions. You pay self employment tax only on the salary portion, which can save thousands of dollars once your income gets high enough.

When to Stick with Being a Sole Proprietor

• Your income is under about $60,000 a year.
• You have very little liability risk in your work.
• You value simplicity and do not want more paperwork or state fees.
• Your creator income is part time or just a side hustle.

As a sole proprietor, you can deduct business expenses, file a Schedule C with your personal taxes, and keep costs low.

When to Form an LLC

• Your income is consistently above $60,000 a year. At that level the tax savings can start to outweigh the added costs.
• Your work in a higher risk category. That might mean dealing with contracts, client disputes, or physical products that could trigger lawsuits.
• You own a home, investments, or savings you want to protect.
• You want to grow, hire, or look more professional to larger brands.

At $100,000 in net income, the S corp election becomes especially valuable, with potential savings of $5,000 to $8,000 in self employment taxes. At $200,000 it is almost always worth it.

Costs to Consider

Forming an LLC is not free. State filing fees range from about $40 to $800 depending on where you live. Some states also charge annual franchise taxes or reporting fees. You may also need to pay for payroll services and an accountant if you choose the S corp path (Beluga coverage for S corps coming soon!)

Professional liability insurance is another option worth noting. Insurance protects your business assets from lawsuits, while an LLC protects your personal assets. Many creators end up with both.

Bottom Line

If you are just getting started, a sole proprietorship is fine. You can always upgrade later. Once you are earning real money, have assets to protect, or want the tax flexibility of an S corp, forming an LLC becomes worth serious consideration.

The decision comes down to risk, income, and goals. For some creators the simplicity of a sole proprietorship is perfect. For others an LLC is the key to protecting what they are building and keeping more of what they earn.

Keep on Creating!

— The Beluga Team