Just to clear it up, all that money is taxable, it's just not withheld.

Do we register as a Sole Proprietorship or LLC?

For tax purposes, there's really no difference between a sole prop and a single member LLC - you'll be taxed on all net income as if it were your personal taxes. LLC really comes into play for legal reasons, as the name implies. Basically, if someone sues you, if you have an LLC, they can get LLC's assets, not your personal assets.

Tax-wise, LLC usually have their own taxes (well, fees), which may or may not be different than sole prop, it just depends on your state, and I don't know TN law, but it looks like it's a $300 annual report fee.