LLC or sole proprietorship: which should you choose?
A sole proprietorship is free and simple, but you're personally on the hook for business debts. An LLC adds liability protection for a state fee and some paperwork. Taxes start out the same, since a single-member LLC files on Schedule C. Choose an LLC when you've got real risk or real assets.
Updated November 2026 · By Pankil Kumar, Managing Partner
Quick facts
- Liability. An LLC separates business and personal assets
- Taxes. A single-member LLC files on Schedule C
- Cost. LLCs have state filing and annual fees
How do they compare?
| Question | Sole proprietorship | LLC |
|---|---|---|
| Setup | None, or a trade name | State filing |
| Personal liability | Yes | Generally limited |
| Federal taxes | Schedule C | Schedule C by default |
| Self-employment tax | Yes | Yes, unless taxed as S-Corp |
| Annual state cost | Usually none | Varies by state |
| Can elect S-Corp | No | Yes |
| Adding partners | Becomes a partnership | Straightforward |
Does an LLC save you tax?
Not by itself. This is the biggest myth about LLCs. A single-member LLC is ignored for federal income tax by default, so your taxes are the same as a sole proprietor's. The savings people talk about come from electing S-Corp treatment, and that's only worth it at certain profit levels.
What does liability protection really give you?
If your business gets sued or can't pay a debt, your personal assets, like your home and savings, are generally protected. It has limits. You're still responsible for your own negligence, and you can't escape loans you've signed for personally. Also, mixing personal and business money can weaken the protection. Insurance still matters, so an LLC doesn't replace it.
When should you choose each one?
A sole proprietorship can make sense if you're testing an idea, the risk is low, and you've got few assets. A freelance writer in year one might be fine.
An LLC makes more sense if you have clients on site, employees, physical products, a partner, property or real savings to protect. Contractors, restaurants and anyone with a lease usually should form one.
Can you switch later?
Yes. Many owners begin as sole proprietors and form an LLC when revenue or risk grows. You'll likely keep the same accounting setup, but you'll want a new business bank account in the LLC's name and updated contracts. Your EIN rules depend on your situation. See how to get an EIN.
Where should you form it?
Usually in the state where you live and work. Here's why Delaware often isn't the answer. We can form your LLC in any state, get the EIN and set up your books.
Sources
- IRS: Business structures
- SBA: Choose a business structure
- IRS: Single member limited liability companies
General information, not tax advice for your situation.
Starting a business?
We form the LLC, get the EIN and set up your books.
See our LLC formation serviceDo I need an LLC to start a business?
No. You can start as a sole proprietor in most cases, though you may need a local license or trade name.
Is an LLC better for taxes?
Not by default. The tax difference only shows up if you elect S-Corp or C-Corp treatment.
Can I be sued personally if I have an LLC?
You can still be sued for your own actions, and courts can look past the LLC if you treat it like your personal account.
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