LLC vs Sole Proprietorship: What's Right for You?

Clear, side-by-side comparisons to help you choose confidently.

Not sure what to choose?

Most new founders start as sole proprietors or form an LLC—but each has pros and cons. This page walks you through the differences, no jargon.

The choice between a sole proprietorship and an LLC is one of the most important decisions you'll make for your business. It affects everything from your personal liability to your tax situation, and even how customers and partners view your business. Understanding these differences can save you thousands of dollars and protect your personal assets.

What is a Sole Proprietorship?

A sole proprietorship is the simplest business structure available. It's essentially you doing business in your own name, with no legal separation between you and your business. You don't need to file any paperwork with the state to start operating as a sole proprietor.

When you're a sole proprietor, you and your business are legally the same entity. This means all business income is your personal income, all business debts are your personal debts, and all business liabilities are your personal liabilities. You report everything on your personal tax return using Schedule C.

While this structure is incredibly simple to set up and maintain, it offers no protection for your personal assets. If your business gets sued or goes into debt, your personal savings, home, and other assets are at risk.

What is an LLC?

An LLC (Limited Liability Company) is a business structure that provides personal liability protection while maintaining flexibility in management and taxation. It's a hybrid structure that combines the benefits of a corporation with the simplicity of a partnership.

When you form an LLC, you create a separate legal entity from yourself. This means the LLC can own property, enter into contracts, and be sued in its own name. Your personal assets are generally protected from business liabilities, debts, and lawsuits.

LLCs offer flexible taxation options. By default, single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. However, LLCs can also elect to be taxed as corporations if it benefits their situation. This flexibility makes LLCs attractive to many business owners.

Side-by-Side Comparison

Feature
Sole Proprietorship
LLC
Personal Liability
No protection
Protected
Tax Simplicity
Simplest
Flexible
Legal Setup
No filing needed
State filing required
Business Credibility
Less formal
More formal
Bank Accounts
Optional
Recommended separate account
Business Credit
Uses personal credit
Can build separate credit
Privacy Protection
Personal info exposed
Can use registered agent
Investor Appeal
Less attractive
More professional

When to Choose Each Structure

Choose Sole Proprietorship if:

  • You're testing out a small solo project
  • You want to keep things ultra-simple
  • You're not too worried about liability
  • You're earning under $10K annually
  • You're working with minimal startup costs

Choose LLC if:

  • You want personal asset protection
  • You're working with business partners
  • You're building long-term and want credibility
  • You're earning significant income
  • You want to build business credit

Key Takeaways

Sole Proprietorship Reality Check

While sole proprietorships are simple to start, they offer zero liability protection. If your business gets sued, your personal assets are at risk.

This includes your home, car, savings, and other personal property. For most serious entrepreneurs, this risk is too high.

LLC Protection Benefits

LLCs provide a legal shield between you and your business. If someone sues your business, they can only go after business assets, not your personal property.

This protection alone often makes the filing cost worthwhile, especially as your business grows.

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