What’s the difference between a sole proprietorship and LLC?

Choosing the Right Business Structure: Sole Proprietorship vs. LLC

Starting a business is an exciting journey, but one of the first big decisions you’ll face is choosing the right legal structure. Should you keep things simple with a sole proprietorship, or go for the added protection of a limited liability company (LLC)? The choice impacts your taxes, personal liability, and business operations.

Let’s break it down so you can make the best decision for your business.

What Is a Sole Proprietorship?

A sole proprietorship is the simplest and most common business structure for solo entrepreneurs. If you start a business and don’t register it as another entity, you’re automatically considered a sole proprietor.

Key Features of a Sole Proprietorship:

• Easy to Set Up: No formal registration required beyond necessary local permits.
• Full Control: You’re the sole owner, making all decisions.
• Personal Liability: There’s no legal distinction between you and your business.
• Pass-Through Taxation: Profits are reported on your personal tax return.

Pros of a Sole Proprietorship

✅ Minimal Paperwork & Costs – No expensive filings or annual reports required. ✅ Complete Control – You make all the decisions without consulting partners. ✅ Simple Taxes – Business income is reported as personal income, avoiding corporate taxes.

Cons of a Sole Proprietorship

❌ Unlimited Personal Liability – If your business is sued or goes into debt, your personal assets (home, car, savings) are at risk. ❌ Limited Funding Options – Banks and investors are less likely to fund sole proprietors. ❌ Harder to Scale – Hiring employees or expanding operations can be more complex.

Learn more about sole proprietorships from the SBA.

What Is an LLC (Limited Liability Company)?

A limited liability company (LLC) is a legal entity that provides personal liability protection while offering flexibility in taxation and management.

Key Features of an LLC:

• Limited Liability Protection: Your personal assets are separate from your business debts.
• Flexible Taxation: You can choose to be taxed as a sole proprietor, partnership, or corporation.
• More Credibility: Having “LLC” in your business name may build trust with clients and investors.

Pros of an LLC

✅ Personal Asset Protection – Your home, car, and savings are shielded from business lawsuits and debts. ✅ Tax Flexibility – Choose between pass-through taxation or corporate tax structures. ✅ More Funding Opportunities – Easier to attract investors and business loans. ✅ Professional Credibility – An LLC appears more established than a sole proprietorship.

Cons of an LLC

❌ More Paperwork & Fees – Requires state registration, annual filings, and fees. ❌ Possible Self-Employment Taxes – Members must pay self-employment taxes if not taxed as a corporation. ❌ Limited Ownership Transferability – Unlike corporations, LLC ownership is harder to transfer.

For a deeper look, check out this Forbes comparison of LLCs and sole proprietorships.

Key Differences Between a Sole Proprietorship and an LLC

Read more about business structures on the IRS website.

Taxes: How Do They Differ?

Sole Proprietorship Taxes

• Pass-Through Taxation: Business income is reported on your personal tax return (Form 1040, Schedule C).
• Self-Employment Tax: You must pay 15.3% for Social Security and Medicare.

LLC Taxes

• Default Pass-Through Taxation: Like sole proprietors, LLC members report income on personal tax returns.
• Option to Be Taxed as a Corporation: An LLC can elect S-corp or C-corp status for potential tax savings.
• Self-Employment Taxes: If taxed as a sole proprietorship, members still owe 15.3% self-employment tax.

Consult the IRS website for more tax details.

Which One Is Right for You?

Choose a Sole Proprietorship If:

• You’re starting a low-risk business (e.g., freelance writing, tutoring, consulting).
• You want to avoid paperwork and keep things simple.
• You’re testing a business idea before committing to a formal structure.

Choose an LLC If:

• You want to protect your personal assets from business liabilities.
• You plan to hire employees or seek business funding.
• You want a more credible, professional business entity.

Still unsure? Speaking with a business attorney or accountant can help clarify the best path for you.

FAQ: Sole Proprietorship vs. LLC

1. Do I need to register a sole proprietorship?

No, but you may need a local business license and register a DBA (Doing Business As) name if using a brand name.

2. How much does it cost to form an LLC?

LLC formation fees vary by state but typically range from $50 to $500. Some states require annual fees.

3. Can I switch from a sole proprietorship to an LLC?

Yes! Many business owners start as sole proprietors and later register an LLC as they grow.

4. Does an LLC protect me from all lawsuits?

An LLC shields personal assets, but you can still be sued for fraud, negligence, or personal guarantees on loans.

5. Do LLC owners get a salary?

LLC owners take owner’s draws rather than salaries unless taxed as an S-corp.

Final Thoughts

Deciding between a sole proprietorship and an LLC depends on your business goals, risk tolerance, and financial situation. While a sole proprietorship is great for simplicity and low-cost startup, an LLC offers liability protection and credibility.

Before making a final decision, consider consulting a legal or tax professional. Whichever route you choose, taking action toward your entrepreneurial dreams is what truly matters.

Thinking about forming an LLC? Check your state’s requirements and get started today!