LLC vs Sole Proprietorship: Which Is Right for Your New US Business?

When you start a business in the US, you have to choose a legal structure, and the two most common starting points are the sole proprietorship and the limited liability company (LLC). The choice affects how much personal risk you carry, how you file taxes, and how much paperwork lands on your desk. This guide walks through the differences in plain English so you can make an informed decision.

One important note up front: this article is informational only. It is not legal or tax advice. Every situation is different, and you should consult a licensed CPA or attorney before finalizing your business structure.

The Quick Version

If you want the short answer first:

• A sole proprietorship is the simplest, cheapest way to operate. You and the business are legally the same thing. Great for testing an idea or running a low-risk side venture.
• An LLC is a registered legal entity that separates your personal assets from your business. It costs a little to set up and maintain, but it gives you liability protection and more flexibility.

The rest of this post explains why that difference matters.

Liability Protection: The Biggest Difference

This is the heart of the decision.

Sole Proprietorship

In a sole proprietorship, there is no legal separation between you and your business. If the business gets sued or runs up debt it cannot pay, your personal assets are exposed. That can include your savings, your car, and in some cases your home.

For a freelance writer or a hobby seller, that risk may be small. For anyone selling physical products, working on client property, or signing meaningful contracts, it can be significant.

LLC

An LLC creates a legal wall between your business and your personal finances. If the business is sued or cannot pay a debt, creditors generally can only reach the assets owned by the business, not your personal property.

This protection is not absolute. Courts can "pierce the corporate veil" if you mix personal and business money, fail to keep records, or commit fraud. To keep the protection intact, you need to:

1. Open a separate business bank account
2. Keep clean, separate financial records
3. Sign contracts in the name of the LLC, not your own name

Taxes: Pass-Through, Self-Employment, and the S-Corp Option

A common myth is that an LLC saves you money on taxes by default. In most cases, it does not change your tax bill at all.

Both Are Pass-Through by Default

By default, both a sole proprietorship and a single-member LLC are pass-through entities. The business itself does not pay federal income tax. Profits "pass through" to your personal tax return, and you pay income tax on them there. A single-member LLC reports income the same way a sole proprietor does, on Schedule C.

Self-Employment Tax Applies to Both

With either structure, you pay self-employment tax (Social Security and Medicare) on your net business income. As of 2026 that rate is 15.3% on the first portion of earnings, on top of regular income tax. This catches a lot of first-time owners off guard, so plan for it.

The S-Corp Election Comes Later

Here is where the LLC offers flexibility a sole proprietorship cannot. Once your business is profitable enough, an LLC can elect to be taxed as an S corporation. That lets you pay yourself a reasonable salary and take additional profits as distributions, which are not subject to self-employment tax.

This can produce real savings, but it only makes sense above a certain income level, and it adds payroll and filing requirements. A CPA can tell you whether the numbers work for you, and at what point to consider it.

Paperwork and Cost

Sole Proprietorship

There is almost nothing to do. In most states, you simply start operating. If you use a business name that is different from your legal name, you file a DBA ("doing business as"), which usually costs a small fee. That is often the only formal step.

LLC

An LLC takes more effort and money:

• File Articles of Organization with your state (typically $50 to $500 depending on the state)
• Pay an annual or biennial filing fee in many states, plus a franchise tax in a few (California's $800 minimum is the well-known example)
• Maintain an operating agreement and keep business finances separate

None of this is hard, but it is ongoing. Budget for the recurring costs, not just the setup.

Getting an EIN

An EIN (Employer Identification Number) is a federal tax ID from the IRS, and it is free to get directly at IRS.gov.

• A sole proprietor with no employees can often use their Social Security number instead, though an EIN is still worth getting to avoid sharing your SSN with vendors and clients.
• An LLC generally needs an EIN to open a business bank account and handle taxes properly.

Be cautious of websites that charge a fee to "obtain" an EIN for you. The IRS does it for free in a few minutes.

When Each One Makes Sense

A sole proprietorship may fit if you:

• Are testing an idea or running a low-risk side business
• Have few assets to protect and limited liability exposure
• Want to keep costs and paperwork to an absolute minimum

An LLC may fit if you:

• Sell products, work on-site, or sign contracts with real financial stakes
• Have personal assets you want to shield
• Plan to grow, bring on partners, or eventually elect S-corp tax treatment
• Want the credibility that a registered entity can signal to clients and lenders

Many founders start as sole proprietors and convert to an LLC once revenue and risk grow. There is nothing wrong with that path, as long as you make the switch before your exposure gets serious.

A Final Word on Getting It Right

The "right" choice depends on your risk, your income, and your goals, and the rules vary from state to state. Use this article to understand the landscape, then confirm the specifics with a professional before you file.

If you are setting up a new business and want the documents and structure to do it properly, our Small Business Starter Kit gives you the templates and checklists to get organized from day one. And if you want a clear roadmap for where the business is headed, the Premium Business Plan helps you map out finances, market, and growth in one place.

Not sure what your business even looks like on paper yet? Start with our free business plan generator and build from there.

Reminder: This post is for general information only and is not legal, tax, or financial advice. Please consult a qualified CPA or attorney about your specific situation.