Home › Guides

LLC vs. Sole Proprietorship

Every unincorporated business starts as a sole proprietorship by default. This comparison shows exactly what changes, and what does not, when you form an LLC instead.

By the LLCForming research teamFees checked Nov 7, 2026

The one-sentence difference

As a sole proprietor, you and the business are legally the same person. As an LLC owner, the business is a separate legal entity that you own. Nearly every difference in cost, paperwork, and protection flows from that single fact.

Side-by-side comparison

Question	Sole proprietorship	LLC
How it starts	Automatically, the moment you do business. No filing.	You file a formation document with the state and pay the state fee.
If the business is sued or owes money	You are personally responsible. Your personal assets are exposed.	Claims generally stop at the business, with the limits described in our LLC guide.
Federal income tax by default	On your personal return, Schedule C.	Identical for a single-member LLC: pass-through, Schedule C.
Self-employment tax	Owed on business profit.	Also owed by default. Forming an LLC alone does not reduce it.
Ongoing state paperwork	None at the entity level. Licenses still apply.	Annual or biennial reports and fees in most states, plus any state LLC tax.
Cost to maintain	Near zero at the entity level.	State report fees, a registered agent if hired, and state-specific taxes. See the calculator.
Banking and credibility	Many banks let sole proprietors open business accounts, sometimes with a DBA.	A registered entity with an EIN opens accounts, leases, and vendor terms more smoothly.
Taking on a partner	You become a general partnership by default, with shared personal liability.	Members and ownership splits are written into an operating agreement.
Business name protection	A DBA registers a trade name but creates no entity and no statewide exclusivity of the kind a formation filing checks.	The state checks your name against its business registry when you file.

The tax question everyone asks

Forming a single-member LLC does not, by itself, change your federal taxes at all. Same Schedule C, same self-employment tax, same deductions. Anyone who sells you an LLC as a tax dodge is selling you a filing fee. Where taxes can change is with an election: an LLC may elect to be taxed as an S corporation, which can reduce self-employment tax on part of the profit for businesses earning enough to justify the payroll and extra filings. That is a calculation for a tax professional with your real numbers, and it is available to an LLC without changing the entity itself.

When each one fits

A sole proprietorship is reasonable when the activity is tiny, low-risk, and has no contracts, no clients who could sue, no employees, and no plans to grow. Testing an idea at a farmers market is the classic case. The cost of staying simple is zero, and you can always form an LLC later.

An LLC earns its keep when you sign contracts, take on debt, hold property, hire anyone, sell products that could hurt someone, or simply have personal assets worth protecting. The formation fee and an annual report are cheap insurance compared to one personal judgment. The honest framing: you are not buying a tax break, you are buying a wall, plus the paperwork discipline that comes with it.

Starting as one and switching later

Plenty of businesses start informal and form an LLC once income or risk shows up. The switch means filing the formation document, getting an EIN for the LLC, moving the bank account and contracts over, and telling your insurers and payment processors. Nothing about starting as a sole proprietor blocks you from forming later, and nothing about forming later erases obligations from before. Form before the risk arrives, not after.