Do you need an LLC? Not to start — but sooner than you think.

A sole proprietorship is you, doing business. In the US, if you start doing paid work and don't register any other kind of business, you are automatically a sole proprietor: there's no form to file to become one. The business's income is your income, you report it on Schedule C with your personal tax return, and the business's debts are your debts. If a customer sues the business or a supplier isn't paid, they can come after your personal assets — your savings, your vehicle, your home — because legally there's no line between you and the business.

An LLC — a limited liability company — draws that line. It's a business structure created by state law: you file a short formation document with your state (usually called Articles or a Certificate of Organization), pay the state's fee, and the LLC exists as its own legal person. It can own a bank account, sign a lease and a contract, hire staff and be sued — and when it's sued or can't pay, the claim is against the LLC's assets, not yours. That's the "limited liability": in most situations your personal loss is limited to what you put into the business.

Two things an LLC is not. It isn't a tax category — the IRS doesn't tax "LLCs"; by default a one-owner LLC is taxed exactly like a sole proprietorship and a multi-owner LLC like a partnership (more on that below). And it isn't a license: forming an LLC doesn't make you a licensed plumber, electrician or contractor — that's a separate process with your state's licensing board, and it's the same whether you're a sole proprietor or an LLC.

Outside the US the names change and so does one principle. In the UK the LLC's cousin is the private limited company (Ltd): a sole trader has unlimited liability for the business's debts and must register for Self Assessment once they earn more than £1,000 in a tax year, while a limited company is registered at Companies House for £100 online (£124 on paper) and files a confirmation statement each year for £50. In Australia it's the proprietary limited company (Pty Ltd), registered with ASIC for a fee that is indexed each 1 July, plus a yearly company fee; a sole trader needs only an ABN, which is free. Confirm the details with your accountant or attorney.

A sole proprietorship is fine while the worst day is cheap. Tutoring, bookkeeping from your kitchen table, a weekend dog-walking round, a notary sideline, a photographer shooting portraits in a studio you rent by the hour: no staff, no lease, no equipment on credit, and the biggest thing that can go wrong is a refund. Many owners run this way for a year to see whether the business sticks, and in the US that is perfectly legal.

The moment it isn't is the first job where the damage could outrun the invoice. For the trades that moment comes early. Ask five questions:

• Do you work on other people's property? A pressure washer etches a patio, a cleaner shrinks a wool rug, a painter's ladder goes through a window, a plumber's fitting lets go overnight. The claim is for the damage, not for your fee.
• Do you drive for the business? A loaded truck in a collision is the single most expensive thing most trades can do; commercial auto insurance pays the claim, and the LLC keeps what insurance doesn't cover off your house.
• Will you hire anyone? The business becomes responsible for what your crew does and for payroll taxes and workers' compensation. You want the business, not you, to be that employer.
• Will you sign a lease, finance equipment or take a loan? Contracts signed by an LLC bind the LLC. (Lenders and landlords often ask the owner to guarantee personally anyway — then the LLC doesn't shield that debt.)
• Do your customers ask? Property managers, general contractors, HOAs and commercial clients regularly want to contract with a company and see a certificate of insurance — "Harbor Coat Painting LLC" on the quote opens doors "Sam Okafor" doesn't.

One yes is enough. Most cleaners, handymen, detailers, landscapers, junk haulers, painters and every licensed trade answer yes to the first question on day one — which is why the Zarla how-to-start guide for each of those trades puts the LLC in step one, next to insurance. If your business has none of the five, start as a sole proprietor, keep the money separate anyway, and form the LLC the month the first yes appears; switching later is a filing, not a rebuild. Not sure which business to start? The service business ideas hub lines up 30 of them with what each costs to start.

In the US, forming an LLC doesn't change your taxes unless you ask it to. The IRS treats a one-owner LLC as a "disregarded entity": the business's profit lands on Schedule C of your personal return, exactly as it does for a sole proprietor. An LLC with two or more owners is taxed as a partnership — it files its own information return and each owner reports their share. Either kind can file Form 8832 to be taxed as a corporation instead; most small trades never do.

The tax that surprises new owners is self-employment tax. In the US, a sole proprietor and an LLC owner pay the same self-employment tax on the business's profit: 15.3% (12.4% for Social Security and 2.9% for Medicare) once net earnings reach $400 a year, with the Social Security part stopping at $184,500 of earnings in 2026, and half of the tax deductible against your income. An employee splits that with an employer; an owner pays both halves, on top of income tax, usually in four estimated payments through the year. Set aside a share of every payment the day it lands — your accountant will give you the percentage for your bracket — and this stops being a surprise.

The S-corporation election is the one tax move an LLC unlocks. An LLC can file Form 2553 to be taxed as an S corporation (the company must have no more than 100 owners and one class of ownership, among other rules). You then pay yourself a reasonable salary through payroll, which carries Social Security and Medicare tax, and take the remaining profit as a distribution, which doesn't. The saving is real once the profit is well above a fair salary for your trade; below that, the payroll service, the separate tax return and the state's rules on S corporations eat it. It's a question for your accountant with last year's numbers in front of you, not a box to tick on day one.

State taxes are where the LLC itself can cost money. Some states charge an LLC a yearly tax or franchise fee whether or not it made a profit — the table above shows which, and how much. Sales tax is a separate question that depends on your state and your service, not on your structure: a sole proprietor and an LLC doing the same taxable work both need the permit and both collect it.

One federal form you no longer file. Since the FinCEN interim final rule of March 26, 2025, companies formed in the US — including LLCs — are exempt from beneficial ownership information reporting, and a final rule of August 11, 2026 made the exemption permanent; only certain foreign companies still report. Outside the US the tax picture flips: a UK limited company pays Corporation Tax on its profit and the owner is taxed again on salary and dividends, where a sole trader simply pays Income Tax through Self Assessment; an Australian Pty Ltd pays company tax at the company rate while a sole trader is taxed at personal rates, and both register for GST at the same turnover threshold (A$75,000 a year). Confirm the details with your accountant or attorney.