How to Start an LLC as a Solo Founder: The Complete Guide (2026)

If you're making money online as a solo founder — selling digital products, freelancing, running a SaaS, or building any kind of business — you need an LLC. Not next year. Not when you're "big enough." Now.

An LLC (Limited Liability Company) is the single most important legal step you can take as a solo founder. It protects your personal assets, gives you tax flexibility, and makes your business legitimate in the eyes of banks, payment processors, and customers.

This guide covers everything: why you need one, which entity type is right for you, the best and cheapest states to file in (with real numbers), a step-by-step walkthrough of the formation process, and the tax strategies that will save you thousands.

1. Why You Need an LLC

Operating without an LLC means you are your business, legally. Every contract, every customer dispute, every liability — it's all on you personally. Your savings, your car, your house. That's what's at stake.

Here's what an LLC gives you:

Personal Asset Protection

An LLC creates a legal wall between your business and your personal life. If your business gets sued, creditors can only go after business assets — not your personal bank account, home, or retirement savings. This is called "limited liability" and it's the entire point of the entity. Without it, a single lawsuit could wipe you out financially.

Tax Flexibility

A single-member LLC is taxed as a "disregarded entity" by default, meaning profits pass through to your personal tax return (Schedule C). You pay income tax and self-employment tax (15.3%) on your net profit. But here's the flexibility: you can elect to be taxed as an S-Corp once your profits grow, which can save you thousands in self-employment tax. More on this in the tax tips section.

Professional Credibility

Having "LLC" after your business name signals to clients, partners, and customers that you're a legitimate operation. It's the difference between "I do freelance stuff" and "I run a registered business." This matters more than you'd think when landing contracts or negotiating rates.

Business Banking and Payment Processing

You need an LLC (or at minimum an EIN) to open a business bank account. Payment processors like Stripe, Gumroad, and Lemonsqueezy require business verification. Without an LLC, you're limited in which platforms you can use and how you can accept payments. An LLC also keeps your business finances cleanly separated from personal spending, which matters at tax time and if you're ever audited.

If You're Making Money Online, You Need One Now

The moment you earn your first dollar from a business activity — selling a product, getting paid for freelance work, collecting ad revenue — you are operating a business. The IRS considers you a sole proprietor by default. That means unlimited personal liability with zero protection. Forming an LLC is fast, cheap, and protects everything you own. There is no good reason to wait.

2. LLC vs Sole Proprietorship vs S-Corp

These three structures cover the vast majority of solo founders. Here's how they compare on the factors that actually matter:

Sole Proprietorship: The Default (and the Riskiest)

If you're earning money and haven't formed any entity, you're already a sole proprietor. It costs nothing and requires no paperwork. The tradeoff is complete personal liability. One lawsuit, one bad contract, one customer injury claim — and your personal assets are on the line. This is fine for a hobby. It's reckless for a real business.

LLC: The Sweet Spot for Solo Founders

An LLC gives you liability protection, tax flexibility, and professional credibility for as little as $50 in some states. It's the right choice for the vast majority of solo founders making money online. You file a single form, get an EIN, open a business bank account, and you're protected. The annual maintenance is minimal in most states.

S-Corp: The Tax Play for Higher Earners

An S-Corp isn't a separate entity type — it's a tax election you can make with your LLC. Instead of paying 15.3% self-employment tax on all profits, you pay yourself a "reasonable salary" (which gets taxed normally) and take the rest as distributions (which avoid self-employment tax). The breakeven point is generally around $50,000+ in annual net profit. Below that, the extra complexity and payroll costs aren't worth it. Above that, the savings can be significant — potentially $5,000 to $15,000+ per year in reduced self-employment tax.

3. Best States to Form Your LLC (Real Data)

Not all states are equal when it comes to LLC costs and requirements. The differences in filing fees, annual reports, and state taxes can add up to thousands of dollars over the life of your business. Here's an honest comparison of the states that matter most for solo founders, based on current 2025-2026 data.

A note about Nevada: Despite its reputation as a "business-friendly" state, Nevada is one of the most expensive options for solo founders. The $425 initial cost ($75 Articles of Organization + $150 Initial List of Managers + $200 State Business License) plus $350 in annual fees ($150 Annual List + $200 Business License renewal) makes it significantly more costly than Wyoming or New Mexico. The no-income-tax benefit also applies to Wyoming and Texas without the high fees.

If You Live in Illinois

Illinois used to be one of the most expensive states for LLC formation at $500. The filing fee was reduced to $150, and the annual report was dropped to $75, making it much more reasonable. Illinois also has no franchise tax on LLCs, which is a significant advantage over states like Delaware ($300/year) or Nevada ($350/year).

4. Step-by-Step: How to Form Your LLC

The entire process takes 15 to 45 minutes depending on your state. You do not need a lawyer. You do not need a formation service. Here's exactly what to do:

5. Costs Breakdown (Real Numbers)

One of the biggest misconceptions about starting an LLC is that it's expensive. Formation services and legal companies perpetuate this myth because they charge $300-$500+ for something you can do yourself in 15 minutes. Here's what it actually costs:

What NOT to Pay For

Formation services like LegalZoom, ZenBusiness, Incfile, and others charge $79 to $349+ for filing your LLC. What they actually do is fill out the same form you'd fill out yourself on your state's Secretary of State website. They then upsell you on "compliance packages," "registered agent services," "annual report filing," and other add-ons that inflate the cost to $500+ per year.

Here's what you can do yourself for free or at cost:

• File Articles of Organization — directly on your state's Secretary of State website ($50-$300)
• Get an EIN — directly on IRS.gov (free, 5 minutes)
• Operating Agreement — use a free template (many available online)
• Annual Report — file it yourself when your state sends you a reminder (takes 5 minutes)
• Registered Agent — you can be your own registered agent if your LLC is in your home state (free)

The only situation where a formation service makes sense is if you genuinely don't want to spend 15 minutes filling out a form and you're comfortable paying a 300%+ markup for convenience.

6. Tax Tips for Solo Founders

Your LLC is a tax vehicle, and using it properly can save you thousands. Here are the strategies that matter most:

Write Off Everything Legitimate

As an LLC, your business expenses reduce your taxable income. Common deductions for solo founders include:

• Domains and hosting — every domain, server, and CDN cost
• Software and tools — Figma, VS Code extensions, Notion, analytics tools, SaaS subscriptions
• Home office deduction — either simplified ($5 per sq ft, up to 300 sq ft = $1,500 max) or actual expenses (proportional rent/mortgage, utilities, internet)
• Internet and phone — the business-use percentage of your monthly bills
• Computer and equipment — laptops, monitors, keyboards, desks, chairs (Section 179 lets you deduct the full cost in year one)
• Education and courses — books, courses, and conferences related to your business
• Marketing and advertising — social media ads, sponsored posts, promotional materials
• Professional services — accounting software, CPA fees, legal consultations
• Health insurance premiums — if you're self-employed and not eligible for an employer plan, you can deduct 100% of premiums

Track these expenses throughout the year using a budget tracker. Don't try to reconstruct a year's worth of expenses in April. Use a separate business credit card and bank account so every business transaction is automatically documented.

Pay Quarterly Estimated Taxes

As a self-employed LLC owner, no one withholds taxes from your income. The IRS expects you to pay estimated taxes quarterly (April 15, June 15, September 15, January 15). If you underpay, you'll owe a penalty. A common rule of thumb: set aside 25-30% of your net profit each month for taxes. Use the IRS Form 1040-ES worksheet to calculate your quarterly payments, or simply base them on the prior year's tax liability.

The S-Corp Election (The Big Tax Play)

This is where the real savings kick in. Once your LLC earns $50,000+ in net profit annually, consider filing IRS Form 2553 to elect S-Corp taxation. Here's why:

As a standard single-member LLC, you pay 15.3% self-employment tax (Social Security 12.4% + Medicare 2.9%) on all of your net profit. On $100,000 profit, that's $15,300 in self-employment tax alone, on top of your income tax.

With S-Corp election, you pay yourself a "reasonable salary" (let's say $50,000) and take the remaining $50,000 as a distribution. Self-employment tax only applies to the salary portion. The $50,000 distribution avoids the 15.3% tax entirely, saving you $7,650 per year in this example.

The catch: you must run payroll (there are cheap services like Gusto starting around $40/month), file additional tax returns (Form 1120-S), and pay yourself a salary the IRS considers "reasonable" for your role. The math usually works out in your favor once you're netting $50K+ annually.

Retirement Accounts: The Hidden Deduction

As a self-employed LLC owner, you have access to retirement accounts with much higher contribution limits than a traditional IRA:

• SEP IRA — contribute up to 25% of net self-employment income (max ~$69,000 for 2024/$70,000 for 2025). Easy to set up, no ongoing admin.
• Solo 401(k) — contribute up to $23,500 as an employee (2025 limit) plus up to 25% of net income as the employer. Total max ~$70,000. Allows Roth contributions too.

Every dollar you contribute reduces your taxable income. If you're in the 22% federal bracket and contribute $20,000 to a SEP IRA, that's $4,400 in tax savings. These accounts compound over decades, and the tax deferral amplifies your returns.

7. Common Mistakes That Cost You Money

These are the errors that trip up solo founders most often. Every one of them is avoidable:

Waiting Too Long to Form

Every day you operate without an LLC, you're personally liable for everything. One client dispute, one product defect claim, one contract gone wrong — and your personal assets are exposed. The cost of forming an LLC is a fraction of the cost of a single lawsuit. Don't wait until you're "making enough." Form your LLC before (or immediately after) your first dollar of business income.

Mixing Personal and Business Finances

This is the fastest way to lose your liability protection. If you commingle funds (pay personal bills from your business account, deposit business income into your personal account), a court can "pierce the corporate veil" and treat your LLC as if it doesn't exist. Get a dedicated business bank account and business credit card. Use them exclusively for business transactions. No exceptions.

Paying for Services You Can Do Yourself

As covered above: never pay for an EIN (free from IRS.gov), don't pay a formation service $300+ to file a $50-$150 form, and don't pay for "compliance packages" that just remind you to file your annual report. The entire formation process is designed to be self-service. The government wants you to file directly.

Not Keeping Records

Keep receipts for every business expense. Save copies of every contract, invoice, and agreement. Document your operating agreement and any amendments. If you're ever audited, you need documentation — not just bank statements, but proof that expenses were legitimate business costs. Use a cloud-based system (Google Drive, Dropbox, or a dedicated accounting tool) so records aren't lost if your computer dies.

Forgetting Annual Reports

Most states require an annual report (or biennial report) to keep your LLC in good standing. Miss the deadline and your LLC can be administratively dissolved — meaning it no longer exists, and you lose your liability protection retroactively. Set a calendar reminder 30 days before your annual report is due. The filing itself takes 5 minutes and usually costs $50-$75.

Choosing a State Based on Hype, Not Math

Delaware and Nevada get a lot of press as "business-friendly" states. Delaware is genuinely excellent — for venture-funded startups raising millions. For a solo founder, the $300/year franchise tax and the need for a registered agent make it more expensive than filing in your home state. Nevada's $425 initial cost and $350/year in annual fees make it one of the most expensive options. Do the math for your specific situation. For most solo founders, your home state is the right answer.

8. Free Tools to Help You Run Your Business

Once your LLC is formed, you need the right tools to run it. SpunkArt offers free business tools that handle the essentials:

The Bottom Line

Forming an LLC is one of the smartest moves you can make as a solo founder. It protects your personal assets, gives you tax flexibility, and signals to the world that you're running a real business. The cost is minimal — as low as $50 in New Mexico — and the process takes less than an hour.

Here's the quick summary:

1. Form your LLC — in your home state for simplicity, or Wyoming/New Mexico for privacy and low cost
2. Get a free EIN — from IRS.gov, never pay a third party
3. Open a business bank account — Mercury, Relay, or Novo (all free)
4. Keep personal and business finances separate — always, no exceptions
5. Track expenses and pay quarterly taxes — set aside 25-30% of profit
6. Consider S-Corp election — once you're netting $50K+/year
7. File your annual report on time — set a calendar reminder
8. Don't overpay — you can do everything yourself for under $200

Stop operating without protection. Your future self will thank you.

Have questions about starting your LLC? Follow @SpunkArt13 for founder tips, business tools, and real-time updates. Browse all free tools at spunk.codes.