The Real Question: Do You Need an LLC?
Millions of side-hustlers operate as sole proprietors — no LLC, no formal structure. For many, that’s fine. But as your revenue grows, two things change:
- Your personal liability exposure increases — a customer complaint or contract dispute can reach your personal assets
- Your tax picture gets more complex — an LLC can open doors to deductions and entity-level strategies
The question isn’t “should I have an LLC someday?” — it’s “at what revenue point does the cost make sense?”
The Three Signals That Say “Form an LLC Now”
Signal 1: You Hit the $2,000 1099-NEC Threshold
In 2026, platforms like Etsy, Fiverr, PayPal, and Venmo for Business are required to issue you a 1099-NEC once they pay you $2,000 or more in a calendar year. This is a significant IRS attention trigger.
When you start receiving 1099s, you are unambiguously operating as a business in the IRS’s eyes. An LLC formalizes that status — and gives you credibility if you’re ever audited.
Signal 2: You’re Showing Consistent Losses
Under the Hobby Loss Rule (§183), if you can’t demonstrate a profit in 3 of 5 years, the IRS may disallow your expense deductions. Operating as a formal LLC — with a business bank account, business plan, and regular activity — is one of the strongest signals that your activity is a real business, not a hobby.
Signal 3: You Have Personal Assets Worth Protecting
An LLC creates a legal separation between your business debts/liabilities and your personal assets (home, savings, car). As a sole proprietor, there is no wall.
2026 LLC Cost Comparison By State
The cost to form and maintain an LLC varies significantly. Here are the key figures for makers and Etsy sellers:
The “Bone Pile” States — High Hidden Costs
| State | Filing Fee | Annual Cost | Hidden Catch |
|---|---|---|---|
| California | $70 | $800/yr | $800 minimum franchise tax (CA FTB) — owed even if you earn $0 |
| New York | $200 | $9/yr | Publication requirement: ~$200–$1,200 in county newspaper ads |
| Massachusetts | $500 | $500/yr | Premium formation + high annual fee |
⚠️ California Warning: The CA Franchise Tax Board charges $800 per year minimum regardless of your revenue. An Etsy seller making $1,500/year would lose money forming a CA LLC until revenue significantly exceeds that floor.
Best Value States for Makers
| State | Filing Fee | Annual Fee | Income Tax |
|---|---|---|---|
| Montana | $35 | $20/yr | Graduated |
| Arkansas | $45 | $150/yr | Graduated |
| Arizona | $50 | $0/yr | Graduated |
| Colorado | $50 | $10/yr | Flat rate |
| Wyoming | $100 | $60/yr | None |
| Nevada | $425 | $350/yr | None |
Wyoming and Nevada are popular for makers who want zero state income tax and reasonable fees — though you still owe federal self-employment tax regardless of your state.
The “LLC Math” Calculation
Before forming an LLC, do this quick math:
Annual revenue $5,000
Annual expenses $2,000
Net profit $3,000
SE Tax (15.3%) ~$424
LLC Annual Cost (TX) $0/yr + $300 formation ÷ 3 years = $100/yr
Net benefit: Liability protection + §183 audit shield + deduction accessFor most makers, the break-even point is around $3,000–$5,000 in annual revenue, depending on your state.
Sole Proprietor vs. LLC: 2026 Tax Impact
| Factor | Sole Proprietor | Single-Member LLC |
|---|---|---|
| How taxed | Schedule C | Schedule C (same — disregarded entity) |
| SE Tax | ✅ Same 15.3% | ✅ Same 15.3% |
| Liability protection | ❌ None | ✅ Personal assets protected |
| §183 audit risk | Higher | Lower (signals serious business) |
| Business bank account | Optional | Recommended / Required |
| Home office deduction | Available | Available |
| QBI Deduction (20%) | Available | Available |
Key Insight: A single-member LLC is a “disregarded entity” — it does not change how you’re taxed. You get liability protection without a tax penalty.
Self-Employment Tax: The Cost You Pay Either Way
Whether you’re a sole proprietor or LLC, you owe self-employment tax once your net earnings exceed $400:
- Rate: 15.3% (12.4% Social Security + 2.9% Medicare)
- Applied to: 92.35% of net earnings
- Example: $3,000 net → ~$424 SE tax
This is separate from income tax and is the primary “hidden cost” new side-hustlers don’t anticipate. Our free estimator calculates your exact SE tax based on 2026 thresholds.
How to Form an LLC: The 5 Steps
- Choose your state — typically your home state, unless you have a specific reason to use Wyoming or Delaware
- Choose a registered agent — required in every state; use a free service or a $50/yr provider
- File your Articles of Organization — submit to your Secretary of State; most states accept online filings
- Get an EIN — free from IRS.gov; takes 5 minutes online; required for a business bank account
- Open a business bank account — this is the single most important step for separating your finances
Total time: 1–3 business days in most states. Total cost: your state’s filing fee.
Use Our Free Estimator First
Before you pay any filing fees, run our free 2026 tax estimator to see your exact SE tax, your 1099-NEC exposure, and your state’s real LLC cost — including hidden fees like CA’s $800 franchise tax.
It takes under 2 minutes and you’ll know exactly where you stand.
This article is for general informational purposes only and does not constitute legal or tax advice. Consult a licensed attorney or CPA for advice specific to your situation.