Sole Proprietorship or LLC?

A sole proprietorship is the easiest, least expensive way to organize your business. Essentially you are the business and the business is you. There is no cost to organize this way. You will report all business income and expenses on your personal tax forms. If you use a name for your business other than your own, you should register with your state. The IRS requires your business to show a profit in 3 out of 5 years to qualify as a business, otherwise it is classified as a hobby and you are not allowed to deduct expenses.

An LLC (limited liability company) is a separate entity and offers the owner the protections of a corporation. All profits or losses flow through to the owner. You will have to write articles of organization and file them with the secretary of state. There is an annual form and fee. You might also be required to draft an operating agreement. Check the specific requirements in your state. You can do the paperwork yourself, or you can use the services of a lawyer and accountant. An LLC is advisable if you plan to grow your business, hire employees, obtain loans, or take partners.

You should research both options carefully before making a decision. Operating as a sole proprietorship does not preclude you from incorporating later.