Guide
LLC vs Sole Proprietorship
What each one costs, how each is taxed, and when the extra paperwork of an LLC is worth it.
Updated October 2026. General US information, not legal or tax advice.
If you sell anything on your own without filing paperwork with your state, you're already a sole proprietor. An LLC (limited liability company) is a separate legal entity you create by filing with your state and paying a fee. The big differences are liability, cost and paperwork. For taxes, the two are often identical.
The short answer
A sole proprietorship is free and simple. An LLC costs money every year in most states, but it puts a legal wall between your business and your personal assets, and it can make you look more established to clients and banks.
If your business has little risk and little revenue, staying a sole proprietor is often fine. If you sign contracts, have customers on site, hire help, or could be sued, the yearly cost of an LLC is usually worth it.
| Sole proprietorship | LLC | |
|---|---|---|
| Setup | Nothing to file with the state (you may need a local license or a DBA name) | File articles of organization with your state |
| State cost | $0 to the state for the business itself | $50 to $1,000 in the first year, depending on the state |
| Personal liability | You and the business are the same: business debts are your debts | Generally limited to what you put into the business |
| Federal income tax | Profit reported on Schedule C of your Form 1040 | Same by default for one owner; a partnership return with two or more owners |
| Self-employment tax | On your net earnings | Same by default; can change with an S corp election |
| Ongoing paperwork | Personal tax return, local licenses | Plus a state annual report or tax in most states |
| Can elect S corp tax status | No | Yes |
Liability: the main reason to form an LLC
As a sole proprietor, there's no legal difference between you and your business. If the business owes money or loses a lawsuit, your personal savings, car and sometimes home can be on the line.
An LLC is its own legal person. In general, its debts and legal claims belong to the LLC, not to you. That protection has limits: you're still responsible for your own negligence, for any loan you personally guarantee, and for taxes. Courts can also ignore the LLC if you treat its bank account as your own.
An LLC doesn't replace insurance. It protects your personal assets, while insurance protects the business itself.
Taxes: usually the same
A common surprise: forming an LLC doesn't change your taxes by itself. The IRS treats a single-member LLC as a "disregarded entity" by default. You report its profit on Schedule C, exactly like a sole proprietorship. An LLC with two or more members is taxed as a partnership by default and files its own information return (IRS: LLCs).
Either way, you pay self-employment tax (Social Security and Medicare) on your net earnings, on top of income tax. The rate is 15.3% in total, and the Social Security part stops at a yearly earnings cap.
What an LLC adds is a choice: it can elect to be taxed as a corporation, including as an S corporation. That can lower self-employment tax once profits are high enough, but it adds payroll and a separate tax return. See LLC vs S corp for how that works.
What an LLC costs
A sole proprietorship costs nothing to the state, though your city or county may require a business license or a fictitious name (DBA) filing if you don't use your own name.
An LLC has a state filing fee and, in most states, a recurring fee or tax. Filing it yourself, the first year ranges from $50 in Arizona to $1,000 in Massachusetts. The median state costs $175. Only 8 states charge nothing to keep a standard LLC in later years.
Optional costs come on top: a registered agent service if you don't want your home address on the public record, and a formation service if you'd rather not file yourself. See the exact cost in your state, line by line, and your state's annual report fee and due date.
Paperwork and upkeep
A sole proprietor files a personal tax return and keeps whatever local licenses the business needs.
An LLC adds a few habits:
- A state annual or biennial report (or a state tax) in most states, with late fees if you miss it.
- A registered agent with an address in the state.
- A separate business bank account, so the liability protection holds up.
- An operating agreement, especially with more than one owner. Some states require one.
Both can get a free EIN from the IRS. Banks usually ask an LLC for one.
When each one makes sense
A sole proprietorship fits if…
- You're testing an idea or earning a little on the side.
- The work carries little risk of lawsuits or debt.
- You want zero state fees and paperwork for now.
An LLC fits if…
- You have clients, contracts, a lease, inventory or employees.
- You have personal assets you'd want protected.
- You want the option of S corp tax treatment as profits grow.
- You want a business identity that is clearly separate from you.
Questions
›Does an LLC save on taxes compared with a sole proprietorship?
Not by default. A single-member LLC is taxed like a sole proprietorship unless it elects to be taxed as a corporation, so the federal income tax and self-employment tax are the same. Tax savings, if any, come from an S corporation election, which has its own costs.
›Do I need an EIN as a sole proprietor?
Not always. A sole proprietor with no employees can generally use their Social Security number. Many open an EIN anyway to keep their SSN off forms and for a business bank account. An EIN is free from the IRS.
›Can I switch from a sole proprietorship to an LLC later?
Yes. You form the LLC with your state and move the business's accounts, contracts and licenses into the LLC's name. Many people start as a sole proprietor and form an LLC once the business has real customers, contracts or risk.
›Does an LLC protect me from everything?
No. It generally keeps business debts and claims away from your personal assets, but you can still be personally liable for your own negligence, debts you personally guarantee, and taxes. Mixing personal and business money can also weaken the protection.
Estimates are for planning only and are not legal, tax or financial advice. Rules vary by state and change over time; for your situation, talk to an accountant or attorney.