There are pros and cons for setting up an LLC:
Pros: you may get some extra liability protection for your personal assets
Cons: It will cost you some money to set one up and there are annual fees (not too much). You will have to keep your business and personal records separate (more paperwork).
If you set up a single person LLC you fill out exactly the same tax forms as a sole proprietor (Schedule C, Form 8829, etc.). Your taxes will be the same. So, you won't lose any tax deductions. If you set up a corporate LLC or a partnership LLC then there are different tax forms to fill out and you will lose the ability to deduct your house expenses.
Liability - You won't get full liability protection for your personal assets. For example, let's say your time-space % is 40%. That means 40% of your assets are business and these are not protected if you are an LLC. In other words, if someone sues you only 60% of your home is protected, the person suing you can come after 40% of your home which is a business asset and not protected by an LLC.
I recommend getting a lot of business liability insurance to protect yourself - $1 million per occurrence and $3 million aggregate. I don't think it's worth considering an LLC unless you are comfortable with more record keeping and have a lot of personal assets you are trying to protect.
For details on all of this see my Family Child Care Legal and Insurance Guide (
www.redleafpress.org).