If you’re starting a business, one of the first questions you’ll face is this:
Should I set up as a sole proprietorship or form an LLC?
This choice affects your taxes, your personal liability, how you get paid, and how your business grows. It’s a big deal—but don’t worry, we’re breaking it down in plain English.
Let’s compare the two most popular business structures in the U.S.—Sole Proprietorship vs. Limited Liability Company (LLC)—so you can figure out which one actually fits your goals, your money, and your peace of mind.
What Is a Sole Proprietorship?
A sole proprietorship is the simplest way to run a business. If you’ve ever done freelance work, sold crafts online, or walked dogs for money without forming a company, congrats—you were a sole proprietor.
Here’s how it works:
- You’re the only owner.
- You are the business (legally and financially).
- You don’t file anything fancy with the state to get started.
- All profits and losses go directly on your personal tax return.
Common examples:
- Freelance designers
- Online Etsy shop owners
- Tutors
- Landscapers
- Food truck operators
Pros:
- Easy and cheap to start
- You make all the decisions
- No separate business tax return
Cons:
- You’re personally on the hook for everything (debts, lawsuits, etc.)
- Harder to get loans or investors
- Might look less “professional” to clients or customers
What Is an LLC?
An LLC, or Limited Liability Company, is a legal structure that creates a wall between your personal assets and your business. It’s more official, but still very doable for solo entrepreneurs and small teams.
Here’s what that means:
- Your business is its own legal entity.
- You’re not personally liable for business debts (in most cases).
- You’ll register your business with the state and pay a fee.
- You’ll need to follow a few more rules—but they’re manageable.
Pros:
- You get liability protection (your car, savings, and home are safer)
- More options for taxes
- Looks more legit to clients, partners, and banks
Cons:
- Higher startup and maintenance costs
- Requires more paperwork
- Needs yearly reports (depending on your state)
Legal Stuff: Who Owns What and How It’s Set Up
Let’s get clear on the legal structure of each:
| Feature | Sole Proprietorship | LLC |
|---|---|---|
| Ownership | One person | One or more members |
| Legal Entity | Not separate | Separate from you |
| Setup | No state filing required | Must file Articles of Organization |
| Name Protection | Only if you file a DBA | Name is protected in your state |
So, if you’re just testing a business idea and want to move fast, a sole prop might be enough. But if you want legal protection and a bit more structure, the LLC wins here.
The Big One: Liability
Here’s where the two structures really pull apart.
Sole Proprietorship:
You and the business are one and the same. If the business is sued or goes into debt, your personal assets are at risk. That includes your car, house, and savings.
LLC:
The LLC is its own legal person. If someone sues your business, they can go after your business assets only—not your personal ones (unless you mess up badly).
Example:
You’re a consultant. A client claims you gave bad advice and sues for damages.
- If you’re a sole prop: Your personal bank account is on the line.
- If you’re an LLC: Your personal assets are protected (as long as you’ve followed all LLC rules).
Taxes: What You Pay and How
Let’s talk about everyone’s favorite topic: taxes (kidding, but this really matters).
Sole Proprietorship:
- All business income goes on your personal tax return (Schedule C).
- You pay income tax + self-employment tax.
- You file once a year, but probably need to make quarterly estimated payments.
LLC:
- By default, single-member LLCs are taxed like sole proprietors.
- Multi-member LLCs are taxed like partnerships.
- You can elect to be taxed as an S Corporation or C Corporation to lower your self-employment tax.
| Tax Feature | Sole Prop | LLC (Default) | LLC (S Corp) |
|---|---|---|---|
| Pass-Through Taxation | ✅ | ✅ | ✅ |
| Self-Employment Tax | ✅ | ✅ | ⚠️ (partial) |
| Separate Tax Return | ❌ | ❌ | ✅ |
| Tax Flexibility | Low | Moderate | High |
Bonus Tip: Choosing S Corp taxation for your LLC can lower your taxes—but it’s only worth it if you’re making a decent profit. Talk to a CPA before making the switch.
Paperwork & Costs
Sole Prop:
- Easy peasy.
- No state registration (just get a local business license if needed).
- No annual reports.
LLC:
- You’ll need to file with your state.
- Pay a formation fee (ranges from $50–$500).
- File annual reports or pay franchise taxes in some states.
- Get an Operating Agreement (not always required, but highly recommended).
Bottom Line: If you’re cool with a little extra paperwork to get peace of mind, LLCs are worth it.
Business Banking and Credit
Do you need a business bank account? Technically no for sole props—but it’s a smart move regardless.
Sole Prop:
- Can use your personal account (not ideal).
- May have trouble getting credit or loans.
LLC:
- Must use a separate business account.
- Can build business credit easier.
- Lenders and clients often prefer working with registered entities.
If you want to look and operate like a real business, go LLC.
Raising Capital
Need investors or a business loan?
- Sole props usually struggle here. You’re limited to personal funds or maybe a credit card.
- LLCs have more flexibility. You can bring on partners, raise funds, and set up profit-sharing.
If you dream of scaling your business someday, this is a big point in favor of the LLC.
So… Which One Should You Choose?
Let’s break it down based on your goals.
| You want… | Go with… |
|---|---|
| To get started fast and cheap | Sole Prop |
| Personal liability protection | LLC |
| Simpler taxes | Sole Prop |
| More tax options and savings | LLC |
| More credibility | LLC |
| Investor opportunities | LLC |
Real-Life Scenarios
Freelance Web Developer (Side Hustle):
You’re working with a few clients on the side and don’t want to deal with paperwork.
→ Sole Proprietorship is perfect for now.
Starting a Shopify Store:
You’re investing in inventory and running ads. You want to keep your personal stuff protected.
→ Form an LLC.
Consulting With a Partner:
You and a friend are starting a consulting business together.
→ An LLC makes sense from day one.
How to Switch from Sole Prop to LLC (If You Need To)
Already running your biz as a sole proprietor? You can upgrade to an LLC any time. Here’s how:
- Choose a business name (check your state database)
- File Articles of Organization with your state
- Get an EIN from the IRS
- Create an Operating Agreement
- Register for licenses/permits if needed
- Open a business bank account
- Update your contracts, invoices, and branding
Yes, it takes effort. But it could save you a lot of stress later on.
Before You Decide…
- Talk to a CPA or lawyer to weigh your specific situation
- Think long-term: Where do you want your business to be in 2–3 years?
- Check your state’s specific rules and fees (they vary!)
- Consider business insurance, regardless of structure
FAQs
Can I start as a sole proprietor and become an LLC later?
Absolutely. Many business owners do exactly that.
Is an LLC totally safe from lawsuits?
No structure is bulletproof. But an LLC gives you way more protection than going solo.
Can I form an LLC by myself?
Yep. Single-member LLCs are very common and easy to manage.
Final Thoughts
At the end of the day, both sole proprietorships and LLCs are great for different reasons.
- Want to keep it simple, low-cost, and easy? A sole prop works great for freelancers and low-risk gigs.
- Want protection, credibility, and flexibility to grow? LLCs are worth the upfront effort.
The right choice depends on where you are—and where you’re headed.
No matter what you choose, the fact that you’re thinking about it means you’re doing this right. 👏