A sole proprietorship is the default business structure in the U.S. — you don't form one, you just start operating. Every freelancer, consultant, or side-hustle owner who hasn't formed a legal entity is automatically a sole proprietor. A single-member LLC, by contrast, is a legal entity you create by filing Articles of Organization with your state and paying a fee. The two structures handle taxes nearly identically by default, but diverge completely on liability.
The key differences at a glance
- Liability: Sole proprietor — unlimited personal liability. Your house, car, and savings are exposed to business creditors and lawsuits. LLC — personal assets are generally protected from business debts and judgments (subject to maintaining formalities).
- Formation: Sole proprietor — none required. LLC — Articles of Organization filed with the state, $50–$500 fee depending on state.
- Tax (default): Both — income and expenses flow through to your personal Form 1040, Schedule C. Self-employment tax applies to both.
- Tax (optional): LLC — can elect S-corp taxation to split income between salary and distributions, potentially saving self-employment tax on profits above ~$50K.
- Credibility: Sole proprietor — operates under your personal name or a DBA. LLC — operates under a formal business name ("Your Company LLC") which many vendors, clients, and landlords prefer.
- Banking: Both can open a business bank account, but LLCs require an EIN and often have an easier time getting business credit.
- Ongoing compliance: Sole proprietor — none. LLC — annual report in most states ($0–$500/yr), registered agent required.
Liability protection: the real reason most people choose an LLC
This is the single biggest structural difference between the two. As a sole proprietor, there's no legal separation between you and your business — if someone sues your business, they're suing you personally. A judgment against your sole proprietorship can attach to your personal bank account, your home (if you own it), your car, and your savings.
An LLC creates a legal wall between you and the business. A business creditor generally can't reach your personal assets. A customer who slips in your office sues the LLC, not you. A vendor you owe money to can go after the LLC's assets, but not your personal ones — assuming you've maintained the LLC properly (separate bank account, no commingling of funds, following state formalities).
Taxes: more similar than you'd expect
The IRS treats a single-member LLC as a "disregarded entity" by default — identical to a sole proprietorship for federal income tax purposes. Both report business income on Schedule C of Form 1040. Both pay 15.3% self-employment tax on net profit (up to the Social Security wage base). There is no default federal tax difference.
The difference appears when your LLC profits grow above ~$50,000/year. At that point, an LLC can elect to be taxed as an S-corporation (by filing Form 2553). An S-corp lets you take part of your income as a distribution instead of wages — distributions aren't subject to self-employment tax. The savings can be substantial at higher income levels. A sole proprietorship can never make this election.
- Under $30K net profit: both structures pay essentially the same total taxes
- $30K–$50K: small S-corp savings possible, but may not offset accountant fees for the election
- Above $50K: S-corp election through an LLC typically saves $2,000–$8,000/year in SE tax
- Both structures: all business expenses are deductible on Schedule C (or Form 1120-S if S-corp)
Cost comparison: formation and ongoing
Sole proprietorship: $0 to form (or a small DBA registration fee if you want to operate under a trade name, usually $10–$50 at the county clerk). No annual state fees. No registered agent required.
LLC: $50–$500 in state filing fees to form. Annual report fees in most states ($0–$500/year). Registered agent ($0 if you serve as your own, $50–$300/year for a commercial service). Total year-1 cost for most states: $100–$700. Total ongoing cost: $50–$500/year depending on state.
| State | Filing fee | Annual report | Notable tax | |
|---|---|---|---|---|
| Montana MT | $35 | $20 annual report | No state sales tax (one of only 5 states) and a $35 filing fee — among the cheapest in the country to start. | Guide → |
| Kentucky KY | $40 | $15 annual report | The $40 filing fee is one of the lowest in the country, but the LLET ($175 minimum, more if your gross receipts cross $3M) is the real annual cost most owners forget about. | Guide → |
| Ohio OH | $99 | $0 | No annual report, no franchise tax, and the CAT now only kicks in above $3M of OH gross receipts — a major small-business win in 2024. | Guide → |
| Wyoming WY | $100 | $60 annual report or $0.0002 per dollar of WY assets, whichever is greater | No income tax of any kind. | Guide → |
| Texas TX | $300 | Public Information Report + Franchise Tax Report annually | No personal income tax. | Guide → |
| California CA | $70 | $20 Statement of Information | The $800 minimum franchise tax is the single biggest cost of running a CA LLC. | Guide → |
| Massachusetts MA | $500 | $500 annual report | Massachusetts is the most expensive state in the country to maintain an LLC: $500 to form, $500 every year. | Guide → |
When a sole proprietorship is the right choice
- You're testing a side project and haven't generated revenue yet
- Your business has no liability exposure — pure digital work, no clients coming to your location, no physical products
- You have no business assets worth protecting
- Annual revenue is under $5,000 and you're not sure the business will continue
- You're in a state with high LLC formation and annual costs (Massachusetts is an extreme example at $500 filing + $500/yr)
When an LLC is the right choice
- You work with clients who could sue (consultants, contractors, designers, developers)
- You sell physical products that could cause injury or property damage
- You have business assets you want to protect (equipment, inventory, IP)
- You're signing contracts with vendors, landlords, or enterprise clients
- You want a business bank account that's clearly separate from personal finances
- Your net profit is above ~$50K and you want the S-corp election option
- You're building something you might sell — buyers prefer purchasing an LLC or corporation over a sole proprietorship
Converting a sole proprietorship to an LLC
There's no formal conversion process — you simply form a new LLC and transfer your business operations to it. Practical steps: file Articles of Organization in your state, get an EIN for the LLC (even if you had one as a sole prop — the LLC is a new entity and needs its own EIN), open a business bank account under the LLC, and update any contracts, licenses, or registrations to the LLC name. The timing matters for taxes: your sole-prop income through the date of conversion goes on Schedule C; post-conversion LLC income also goes on Schedule C (if you remain a disregarded entity) but under the LLC's EIN.
Don’t want to file yourself? Northwest Registered Agent files your LLC for $39 + state fee and acts as your registered agent the first year free.
Frequently asked questions
Is an LLC taxed differently than a sole proprietorship?
Not by default. The IRS treats a single-member LLC as a "disregarded entity" — income flows through to your personal Schedule C, same as a sole proprietorship. Both pay 15.3% self-employment tax. The difference is that an LLC can elect S-corp taxation, which can reduce self-employment tax when profits are above ~$50K.
Can a sole proprietor be sued personally?
Yes — fully. As a sole proprietor, there's no legal separation between you and your business. A lawsuit against your business is a lawsuit against you personally. Your personal bank accounts, home, car, and savings can all be reached by a business creditor or judgment.
Do I need an LLC for a side hustle?
It depends on the risk level. A solo freelancer writing articles online with no clients visiting their home has minimal liability exposure — a sole proprietorship may be fine. A side hustle involving physical work, clients in your space, products that could cause injury, or significant contracts warrants an LLC. The filing fee ($50–$300 in most states) is cheap compared to one liability incident.
Can a sole proprietor open a business bank account?
Yes. Sole proprietors can open business bank accounts — typically with a DBA (Doing Business As) registration and a personal SSN. LLCs use their EIN. The LLC bank account is preferable for liability reasons: using a single personal/business account makes it harder to demonstrate financial separation, which courts look at when deciding whether to pierce the veil.
What is a DBA and does a sole proprietor need one?
A DBA (Doing Business As) — also called a trade name, fictitious name, or assumed name — lets you operate under a name other than your legal name. Sole proprietors need a DBA to do business as "ABC Consulting" instead of "Jane Smith." LLCs operate under their LLC name by default but can also register a DBA for a different brand. DBA registration is typically at the county clerk level, $10–$100.
Is it easy to go from sole proprietor to LLC?
Yes. There's no formal conversion. You file Articles of Organization in your state, get a new EIN for the LLC, open an LLC bank account, and transfer your business operations. It can be done in a day or two in most states. The main administrative tasks are updating vendor agreements, client contracts, and any business licenses to the LLC name.