Sole Proprietorship vs LLC: All You Need to Know

Choosing between a Sole Proprietorship and an LLC can feel overwhelming—especially if you’re just starting your business journey. The structure you choose will affect your taxes, legal protection, and how much paperwork you'll deal with. If you're confused about liability, cost, or the best structure for freelancers or small businesses, you're not alone. This blog breaks it down clearly—no jargon, just answers.

Did you know that over millions of U.S. businesses are sole proprietorships, making it the most common structure? But LLCs are growing fast due to better legal protection. So, which is right for you? Let’s help you decide with facts, pros, cons, and real numbers.

What is the Difference Between a Sole Proprietorship and an LLC?

If you're launching a new business, one of your first big decisions is choosing a structure: Sole Proprietorship vs LLC. This decision shapes how you pay taxes, protect your personal assets, and even how credible your brand appears to customers and banks.

Both are popular options for small business owners, freelancers, and online sellers. But the right choice depends on how much risk you're willing to take and what your business goals are. Let’s break it down in plain English—no legal fluff—so you feel confident moving forward.

Sole Proprietorship Explained

A sole proprietorship is the simplest form of business. If you run a business by yourself and haven’t registered it as an LLC or corporation, you’re likely a sole proprietor by default.

It works best for freelancers, consultants, or anyone starting small with minimal risk. You don’t need to file formal paperwork to create one. You just start doing business.

But here’s the catch—you and your business are the same in the eyes of the law.

What that means:

• Your personal assets are on the line if your business is sued.
• You report income and expenses on your personal tax return (Schedule C).
• You pay self-employment taxes (15.3% combined for Social Security and Medicare).

Example: If you’re a graphic designer working from home, you can register your business name (DBA) locally and file taxes as a sole proprietor. According to the IRS, over 41.1 million taxpayers filed as sole proprietors in the U.S. in 2023.

What is an LLC (Limited Liability Company)?

An LLC, short for Limited Liability Company, is a legal business structure that separates you from your business. It provides business liability protection, which means your personal assets like your house, car, or savings are not at risk if the business faces a lawsuit or debt.

It’s a favorite for small businesses and startups that need more structure without jumping into full corporate complexity.

Key highlights of an LLC:

• You get legal protection even as a one-person business.
• You can choose how you’re taxed—by default as a sole proprietor (single-member LLC), or you can opt for S Corp status for better tax treatment.
• You build more credibility with banks and customers.

Example: Running an online store or a dropshipping business? Forming an LLC boosts your trust factor with payment processors and helps separate your personal and business finances.

LLC vs Sole Proprietorship Quick Comparison Chart

Let’s make it easier. Here’s how sole proprietorship vs LLC stacks up across key factors:

Sole Proprietorship: Pros, Cons, and Tax Details

If you're thinking about starting a business and want something fast, easy, and low-cost, a sole proprietorship might seem like the ideal choice. It’s the most common structure for freelancers, independent contractors, and side hustlers. You don’t need to file paperwork with the state to get started.

But simplicity comes with trade-offs. Let's walk through the advantages, disadvantages, and tax realities of being a sole proprietor so you can see how it stacks up in the Sole Proprietorship vs LLC debate.

Advantages of a Sole Proprietorship

A sole proprietorship shines when you're just getting started or testing the waters. It offers speed, control, and minimal red tape.

1. Easy and Inexpensive to Set Up

You don’t need to file formal business formation documents to get started. If you’re using your legal name, there's often no need to register anything at all. At most, you might need a local business license or fictitious name (DBA) if operating under a brand name.

This low barrier to entry makes it a great fit for freelancers and first-time entrepreneurs.

2. Full Control and Decision-Making Power

As the sole owner, you're in charge of everything—pricing, operations, services, and decisions. You don’t need to consult with partners or follow a formal structure. This flexibility is a major plus for those who like moving quickly and staying lean.

3. Simple Tax Reporting

Taxes are straightforward. You report business income and expenses on Schedule C of your personal tax return (Form 1040). There’s no separate business tax return. No corporate filings. Just you and the IRS, once a year.

Disadvantages of a Sole Proprietorship

Now for the downsides—because every business structure has them. And for sole proprietorships, they can be significant as you grow.

No Liability Protection

This is the biggest drawback. If your business gets sued or owes money, your personal assets are fair game—your house, car, even savings. There’s no legal separation between you and the business. That’s why business liability protection is a major reason many entrepreneurs eventually switch to an LLC.

Difficulty Raising Funds

Investors usually don’t fund sole proprietors. You also can’t sell equity or bring in partners easily. Even getting a loan is harder, since lenders prefer registered entities like LLCs or corporations with separate business credit histories.

Harder to Establish Credibility

In some industries, being a sole proprietor may seem “less official.” Clients or partners might prefer to work with a registered business. That little “LLC” at the end of your name can sometimes make a big difference in perceived professionalism.

Tax Implications of a Sole Proprietorship

Let’s talk taxes—because they're a major part of the sole proprietorship vs LLC conversation.

Pass-Through Taxation

The business doesn’t pay taxes separately. Instead, profits pass through to your personal tax return. This means you pay income tax based on your total business profit—just like a single-member LLC taxed as a disregarded entity.

But the key difference shows up here:

Self-Employment Tax Responsibility

You're on the hook for self-employment taxes, which cover Social Security and Medicare—a combined 15.3% on your net earnings.

Unlike employees who split this cost with their employer, you pay the full amount yourself. For example, if your business earns $60,000 in profit, you’d owe about $9,180 in self-employment tax, on top of regular income tax.

You can deduct half of this amount when calculating your adjusted gross income, but the impact still adds up quickly.

If you're comparing self-employment tax vs LLC, note that an LLC taxed as an S Corp can potentially reduce this burden by paying yourself a reasonable salary and taking the rest as distributions (which are not subject to self-employment tax). That’s why many business owners eventually shift from sole proprietorship to LLC when revenue grows.

LLC: Pros, Cons, and Tax Benefits

An LLC (Limited Liability Company) is one of the most popular small business legal structures today. It strikes a solid balance between simplicity and protection. If you’re growing beyond freelancing or want to protect your personal assets while looking professional, the LLC vs sole proprietorship debate leans heavily in favor of the LLC.

As of 2023, over 4.5 million active LLCs operate in the U.S., and that number keeps rising due to their flexibility and credibility. (Statista)

Let’s explore the advantages, drawbacks, and tax treatment of an LLC to help you decide if it's right for your business goals.

Advantages of an LLC

An LLC gives you a level up from a sole proprietorship. It’s still simple to manage but comes with more protection and room to grow.

Limited Liability Protection

This is a game-changer. As an LLC owner, your personal assets are shielded from business debts, lawsuits, and liabilities. That means if your business is sued, your house, car, or savings are not at risk (unless you signed a personal guarantee or committed fraud).

This level of business liability protection is why many sole proprietors transition to LLCs as their operations expand.

Credibility and Professionalism

Let’s face it—having “LLC” after your business name builds trust. Clients, vendors, and even banks often take LLCs more seriously than unregistered businesses. It shows that you're committed, organized, and legally compliant.

Whether you're applying for a business loan or selling on Amazon, an LLC adds legitimacy and helps you compete in the market.

Flexible Ownership Structure

LLCs offer freedom in how you run the business. You can have:

• A single-member LLC (you alone), or
• A multi-member LLC (with partners or investors)

Unlike corporations, LLCs don’t require a board of directors or strict internal rules. You set the terms in your Operating Agreement, which defines roles, profit sharing, and how decisions are made.

Disadvantages of an LLC

While LLCs offer more protection and flexibility, they also come with added responsibilities and costs.

Higher Startup and Maintenance Costs

Forming an LLC means filing with your state, which costs anywhere from $50 to $500, depending on where you live. In California, you also pay an $800 annual franchise tax, no matter how much you earn.

You may also need:

• An EIN (Employer Identification Number)
• A business license
• An annual report filing (required in most states)

These aren’t dealbreakers, but they’re worth budgeting for.

More Paperwork and Compliance

You’ll need to stay organized. Many states require you to:

• File annual reports
• Pay renewal fees
• Maintain accurate records

This is still far simpler than running a corporation, but more demanding than being a sole proprietor.

Self-Employment Tax (If Not Taxed as S Corp)

By default, LLC owners pay self-employment tax on the entire profit—just like sole proprietors. This includes 15.3% for Social Security and Medicare. So if you earn $100,000 in net income, you’d owe $15,300 in self-employment taxes alone.

The good news? You have other tax options.

Tax Treatment of an LLC

Here’s where LLCs offer real tax flexibility—one of the biggest reasons people prefer them in the sole proprietorship vs LLC comparison.

Pass-Through by Default

By default, the IRS treats LLCs as pass-through entities. This means the business itself doesn’t pay federal taxes. Instead, profits “pass through” to the owner’s personal tax return. This setup is the same as a sole proprietorship but with the legal protection LLCs provide.

If you're the only owner, the IRS treats you as a disregarded entity. If you have partners, you file as a partnership.

Option to Be Taxed as S Corp or C Corp

Here’s the powerful part: you can elect to be taxed as an S Corporation.

Why does that matter?

• As an S Corp, you can pay yourself a reasonable salary and take the remaining profits as dividends.
• Dividends are not subject to self-employment tax—which could save you thousands each year.

Let’s say your business profits are $100,000. As an S Corp, you pay yourself $60,000 in salary and take $40,000 as dividends. You only pay self-employment tax on the salary. That could mean $6,000–$7,000 in tax savings. Of course, you’ll need payroll setup and may face more IRS scrutiny, so speak with a tax advisor first.

Note: LLCs can also elect C Corp status, but this is rare for small businesses due to double taxation unless you’re reinvesting profits heavily.

Sole Proprietorship vs LLC: Key Differences at a Glance

When comparing Sole Proprietorship vs LLC, it helps to zoom out and look at the major differences in one place. Both business structures have their perks, but each suits a different kind of entrepreneur. Whether you’re launching a freelance business, ecommerce store, or side hustle, these categories will help you figure out which path makes more sense for your situation.

Let’s break it down in clear, simple terms—so you get the full picture without the legal overwhelm.

Personal Liability

This is often the biggest deciding factor.

• A sole proprietorship offers no legal separation between you and your business. If something goes wrong—debt, lawsuit, or damages—your personal assets are on the line.
• An LLC protects your personal property. It’s a separate legal entity. That means creditors can't touch your home, car, or savings if your business runs into trouble.

For anyone dealing with clients, inventory, or physical locations, this business liability protection is critical.

Business Name and Registration

Setting up a name works differently for each structure.

• As a sole proprietor, you can operate under your legal name. If you want a brand name, you’ll need to file a DBA (Doing Business As) with your local government.
• With an LLC, your business name is automatically protected when you register with the state. No one else in your state can use it.

This offers more credibility and brand protection from day one.

Tax Filing and Rates

Both structures are taxed as pass-through entities by default, but how you handle taxes can vary.

• A sole proprietor reports income and expenses on Schedule C of their personal tax return and pays self-employment taxes (15.3% for Social Security + Medicare).
• An LLC can also be taxed the same way—but here’s the difference: LLCs can choose to be taxed as an S Corp or C Corp, which may reduce taxes depending on your income level.

Startup and Ongoing Costs

Cost matters—especially when you’re just getting started.

• A sole proprietorship is nearly free to launch. In most states, you just start working. A DBA or business license might cost $25–$100.
• An LLC requires a state filing fee, usually between $50 and $500, plus potential annual reports and fees. In California, there’s a mandatory $800 franchise tax yearly.

It’s an upfront investment, but for many, the protection and perks are worth it.

Funding and Loans

This is where the structure makes a real impact on your growth potential.

• As a sole proprietor, it’s harder to access credit. Banks and investors often see these businesses as less stable or legitimate.
• An LLC adds professionalism. You can open a business bank account, build business credit, and even bring in investors if needed.

If you plan to scale or raise money, an LLC makes your business look more fundable.

Ease of Setup and Maintenance

• A sole proprietorship is the fastest and simplest to set up. No state registration. Minimal forms. Just get a business license (if needed), and you’re ready.
• An LLC takes more time. You file Articles of Organization, create an Operating Agreement, and follow annual compliance steps.

However, many services today let you start an LLC online in minutes, making the process smoother than ever.

Business Growth and Scalability

Think about the future, not just the start.

• Sole proprietorships work great for freelancers, consultants, and hobby businesses. But when you hire, expand, or earn more, their limits show.
• LLCs are built for growth. You can add partners, change tax status, bring in investors, and scale across states.

They also make sense for ecommerce businesses, agencies, or startups planning to evolve beyond solopreneurship.

Sole Proprietorship vs LLC: Which Is Right for You?

You’ve explored the pros, cons, tax rules, and legal protections. But here’s the big question—which structure fits your business best? In the Sole Proprietorship vs LLC debate, the right answer depends on your goals, income, and how much risk you’re willing to take.

Let’s simplify the choice with clear guidance.

When to Choose a Sole Proprietorship

Go with a sole proprietorship if:

• You’re just starting out and want to test an idea.
• You’re a freelancer, contractor, or consultant working alone.
• Your business has low legal or financial risk.
• You want the fastest, cheapest setup.

When to Choose an LLC

Choose an LLC if:

• You want to protect your personal assets.
• You run an ecommerce store, agency, or service business with clients.
• You’re making consistent revenue and want tax flexibility.
• You’re building a brand and need credibility with banks or partners.

LLCs work great for scaling and offer legal protection with minimal overhead. Many entrepreneurs who start as sole proprietors upgrade to an LLC as they grow.

Which Is Better for Taxes?

Both structures offer pass-through taxation. But an LLC has more options.

• Sole proprietors pay self-employment tax on all profits (15.3%).
• LLCs can reduce tax burden by electing S Corp status—only paying self-employment tax on a set salary, not the full income.

If you make over $80,000/year, an S Corp election could save you $3,000–$7,000+ in taxes annually. Always consult a tax pro before switching.

Which Offers Better Legal Protection?

This is where the LLC clearly wins.

• Sole proprietorship = no protection. You’re personally liable for business debts.
• LLC = full business liability protection. Your personal assets stay safe.

For anything beyond solo freelancing, an LLC gives you more peace of mind and long-term security.

How to Form Each Business Structure

If you're ready to launch your business, understanding how to legally form either a sole proprietorship or LLC is the next step. Each setup has different requirements, costs, and paperwork—but both can be done quickly and affordably.

Here’s how to get started, whether you’re leaning toward a sole proprietorship or LLC.

How to Start a Sole Proprietorship

Starting a sole proprietorship is fast and beginner-friendly.

• Pick a business name. If it’s not your legal name, file a DBA (Doing Business As) with your state or county.
• Check licensing requirements. Some industries or locations may need a local business license or permit.
• Get an EIN (optional). If you don’t hire employees, you can use your SSN. But an Employer Identification Number helps separate personal and business finances.
• Open a business bank account. Even sole proprietors benefit from clean bookkeeping.

How to Set Up an LLC

Forming an LLC involves a few more steps—but still takes just a few hours online.

• Choose a unique business name. It must comply with state rules and include “LLC.”
• File Articles of Organization with your state’s Secretary of State.
• Appoint a Registered Agent. This person or service handles legal documents.
• Create an Operating Agreement. This outlines ownership, rules, and how profits are shared (even if you’re solo).
• Get an EIN from the IRS. This is free and required for taxes, banking, or hiring.

Timeframe and Required Documents

Here’s a quick overview of what you’ll need:

In states like Delaware or Wyoming, LLCs are processed fast. In California, expect 10–15 business days.

Converting Between a Sole Proprietorship and an LLC

If you’ve been running a business and now feel like it’s time to level up or scale down, you’re probably wondering how hard it is to switch structures. The good news? It’s easier than most people think. Whether you're moving from a sole proprietorship to an LLC or going the other way around, the process is pretty straightforward.

Let’s walk through what really happens—no fluff, just facts.

Can You Convert a Sole Proprietorship to an LLC?

Yes, and it’s actually a common move as businesses grow.

If you're earning more, handling inventory, or want business liability protection, an LLC makes sense. Here’s how you can convert:

1. Choose an LLC name and check its availability with your state.
2. File Articles of Organization with your state agency (usually the Secretary of State).
3. Get a new EIN from the IRS (yes, even if you had one before).
4. Update licenses, permits, and bank accounts under the new LLC name.
5. Close the sole proprietorship formally if required by your state.

Can You Switch from LLC to Sole Proprietorship?

Technically, yes—but it’s more of a shutdown and restart.

An LLC is a legal entity, so you’ll need to dissolve it with the state before operating as a sole proprietor. Once that’s done, you can simply start doing business under your legal name—or file a DBA if you prefer a business name.

Keep in mind: you lose limited liability protection, which is one of the biggest advantages of an LLC. Make this move only if you’re downsizing or going back to low-risk, solo work.

What Happens to Your Business Name and EIN?

This is where things get a little technical—but still manageable.

• If you convert to an LLC, your DBA doesn’t carry over automatically. You’ll likely need to re-register it or include it in your LLC filing.
• Your EIN (Employer Identification Number) will change when you form an LLC. The IRS considers the LLC a new entity, even if you're the same person behind the scenes. (IRS EIN Guidelines)

You'll also need to update your business bank accounts, contracts, payment gateways, and tax filings to reflect the new structure.

Costs of Forming and Maintaining Each Structure

When weighing the choice between a sole proprietorship vs LLC, cost often plays a major role—especially for new business owners. Both structures are affordable, but the setup and ongoing fees vary depending on where you live and how much legal protection you need.

Here’s what you really need to know before deciding.

Cost of Forming a Sole Proprietorship

Starting a sole proprietorship is simple and very budget-friendly. In most states, you don’t need to file anything to get started.

But if you plan to operate under a business name (not your own), you’ll likely need a DBA (Doing Business As), also known as a fictitious name. The cost usually ranges from $10 to $100.

Other possible costs:

• Business license or permit: May be required based on your location or industry.
• Zoning fees (for home-based businesses): Rare, but worth checking.

Overall, you can often start a sole proprietorship for under $100.

Cost of Forming an LLC

Forming an LLC costs more upfront, but it comes with business liability protection and more credibility.

Here are the basic expenses:

• State filing fee: Ranges from $50 to $500, depending on the state.
• Registered agent service (if not self-managed): Around $100–$300/year.
• Operating Agreement and EIN: Free if you do it yourself, or bundled into formation packages.

Ongoing costs may include:

• Annual report fees (required in most states): Typically $50–$150/year.
• Franchise taxes: Varies by state.

Expect to pay $200–$800 to start an LLC, plus yearly maintenance fees.

State-Specific Considerations (e.g., California)

Some states charge significantly more than others—California being a prime example.

• In California, every LLC must pay an $800 annual franchise tax, even if it earns no income.
• There’s also a $70 formation fee and additional costs for DBAs or certified copies.
• As of 2024, California offers first-year tax exemptions for qualified small businesses—but only if you file correctly and on time.

In contrast, Texas, Delaware, and Wyoming are known for being LLC-friendly with low fees and strong privacy protections.

Conclusion

Choosing between a sole proprietorship, LLC, or S Corp depends on your business goals, income, and risk tolerance. A sole proprietorship is ideal for beginners who want low-cost, no-fuss setup. An LLC offers personal asset protection and room to grow, making it perfect for scaling businesses. If you’re earning steady profits, electing S Corp status can bring significant tax savings. Each structure has trade-offs, but understanding them helps you make the right move. Whether you're freelancing, running an ecommerce store, or launching a startup, pick the structure that aligns with your vision—and don’t be afraid to upgrade as you grow.