Sole Proprietorship
Simplest way to start. Zero paperwork. Zero cost. You are the business.
LLC
Liability protection. Tax flexibility. Professional credibility.
Sole Proprietorship vs LLC:
Which Business Structure Is Right for You?
An interactive, unbiased guide to help you choose the right structure. Take the quiz, compare side by side, and see real tax numbers for your situation.
Take the 2-Minute QuizQuick Verdict
Choose an LLC if you need liability protection, plan to hire, or want S-Corp tax flexibility. Stay sole prop if you want simplicity and low cost, especially under $50k/year in revenue.
Which Structure Is Right for You?
Answer 7 quick questions to get a personalised recommendation.
Question 1 of 7
What kind of business are you starting?
Side-by-Side Comparison
Every key difference between a sole proprietorship and an LLC, in one table.
| Factor | Sole Proprietorship | LLC |
|---|---|---|
| Formation | No filing required. You are the business the moment you start working. | File Articles of Organization with your state. Takes 1-2 weeks. |
| Cost to start | $0 (maybe $10-$50 for a DBA filing if using a business name) | $50-$500 depending on state |
| Ongoing requirements | None beyond taxes | Annual report in most states ($0-$800/year depending on state) |
| Liability protection | None. Your personal assets (house, car, savings) are at risk. | Yes. Personal assets are protected from business debts and lawsuits. |
| Default taxation | Report on Schedule C. Pay self-employment tax (15.3%) on all profit. | Same as sole prop by default. Single-member LLC uses Schedule C. |
| Tax flexibility | One option only: Schedule C | Can elect to be taxed as sole prop, partnership, S-Corp, or C-Corp. |
| Self-employment tax | 15.3% on all net profit (up to SS wage base) | Same by default, but S-Corp election lets you reduce SE tax on distributions. |
| Credibility | Informal. Some clients and vendors may hesitate. | Professional. Often required by contracts, grants, and enterprise clients. |
| EIN requirement | Optional (can use your SSN) | Recommended (and required if you have employees or elect S-Corp) |
| Business bank account | Optional but recommended | Strongly recommended. Needed to maintain liability protection. |
| Transferability | Cannot be transferred or sold as a business entity. | Can transfer membership interests, add members, or sell the LLC. |
| Fundraising | Difficult. Investors generally will not fund a sole proprietorship. | Easier. Can issue membership interests to investors. |
Tax Comparison Calculator
See your estimated federal tax burden as a sole proprietor vs an LLC with S-Corp election.
As Sole Proprietor
As LLC (S-Corp Election)
Estimated annual savings with S-Corp election
$3,524/year
Important: The S-Corp election typically saves money once profits exceed $50,000-$60,000/year. Below that threshold, the extra accounting costs ($1,500-$3,000/year for payroll and a separate tax return) usually outweigh the tax savings. A single-member LLC without the S-Corp election is taxed the same as a sole proprietorship.
These are simplified estimates for educational purposes. Does not include state taxes, QBI deduction, or other credits. Consult a tax professional for personalised advice.
State-by-State LLC Formation Costs
All 50 states with filing fee, annual report fee, and total first-year cost. Click column headers to sort.
Cheapest
New Mexico
$50 + $0/yr
Popular
Wyoming
$100 + $60/yr
Startups
Delaware
$90 + $300/yr
Watch out
California
$70 + $800/yr
| State ↑ | Filing Fee - | Annual Report - | Year 1 Total - |
|---|---|---|---|
| Alabama (AL) | $236 | $0/yr | $236 |
| Alaska (AK) | $250 | $100/yr | $350 |
| Arizona (AZ) | $50 | $0/yr | $50 |
| Arkansas (AR) | $45 | $150/yr | $195 |
| California (CA) | $70 | $800/yr | $870 |
| Colorado (CO) | $50 | $10/yr | $60 |
| Connecticut (CT) | $120 | $80/yr | $200 |
| Delaware (DE) | $90 | $300/yr | $390 |
| Florida (FL) | $125 | $138/yr | $263 |
| Georgia (GA) | $100 | $50/yr | $150 |
| Hawaii (HI) | $50 | $15/yr | $65 |
| Idaho (ID) | $100 | $0/yr | $100 |
| Illinois (IL) | $150 | $75/yr | $225 |
| Indiana (IN) | $95 | $32/yr | $127 |
| Iowa (IA) | $50 | $60/yr | $110 |
| Kansas (KS) | $160 | $55/yr | $215 |
| Kentucky (KY) | $40 | $15/yr | $55 |
| Louisiana (LA) | $100 | $35/yr | $135 |
| Maine (ME) | $175 | $85/yr | $260 |
| Maryland (MD) | $100 | $300/yr | $400 |
| Massachusetts (MA) | $500 | $500/yr | $1,000 |
| Michigan (MI) | $50 | $25/yr | $75 |
| Minnesota (MN) | $155 | $0/yr | $155 |
| Mississippi (MS) | $50 | $0/yr | $50 |
| Missouri (MO) | $50 | $0/yr | $50 |
| Montana (MT) | $70 | $20/yr | $90 |
| Nebraska (NE) | $105 | $13/yr | $118 |
| Nevada (NV) | $75 | $150/yr | $225 |
| New Hampshire (NH) | $100 | $100/yr | $200 |
| New Jersey (NJ) | $125 | $75/yr | $200 |
| New Mexico (NM) | $50 | $0/yr | $50 |
| New York (NY) | $200 | $9/yr | $209 |
| North Carolina (NC) | $125 | $200/yr | $325 |
| North Dakota (ND) | $135 | $50/yr | $185 |
| Ohio (OH) | $99 | $0/yr | $99 |
| Oklahoma (OK) | $100 | $25/yr | $125 |
| Oregon (OR) | $100 | $100/yr | $200 |
| Pennsylvania (PA) | $125 | $7/yr | $132 |
| Rhode Island (RI) | $150 | $50/yr | $200 |
| South Carolina (SC) | $110 | $0/yr | $110 |
| South Dakota (SD) | $150 | $50/yr | $200 |
| Tennessee (TN) | $300 | $300/yr | $600 |
| Texas (TX) | $300 | $0/yr | $300 |
| Utah (UT) | $54 | $18/yr | $72 |
| Vermont (VT) | $125 | $35/yr | $160 |
| Virginia (VA) | $100 | $50/yr | $150 |
| Washington (WA) | $200 | $60/yr | $260 |
| West Virginia (WV) | $100 | $25/yr | $125 |
| Wisconsin (WI) | $130 | $25/yr | $155 |
| Wyoming (WY) | $100 | $60/yr | $160 |
Fees are approximate and subject to change. Check your state's Secretary of State website for current rates.
When to Switch from Sole Prop to LLC
Revenue crosses $50,000/year
At this level, the S-Corp tax election can save you $2,000-$5,000+ annually in self-employment tax. That more than covers the LLC filing and accounting costs.
You take on clients with contract requirements
Enterprise clients, government contracts, and some grant programmes require you to operate as an LLC or corporation. Being a sole prop can disqualify you.
You hire your first employee
While sole proprietors can hire, an LLC provides a cleaner legal structure for employment and reduces your personal liability exposure from employee-related claims.
Your business carries physical or product risk
If you sell physical products, host events, or provide services where something could go wrong, the LLC liability shield protects your personal assets.
You want to seek investment or bring on partners
Investors will not put money into a sole proprietorship. You need an LLC (or corporation) to issue membership interests or equity.
You want to build business credit
An LLC with its own EIN can build credit separately from your personal credit score, making it easier to get business loans and credit cards.
How to Convert: Step by Step
- 1Choose which state to file in (usually your home state)
- 2File Articles of Organization with your Secretary of State
- 3Get an EIN from the IRS (free, takes 5 minutes online)
- 4Write an Operating Agreement (even single-member LLCs should have one)
- 5Open a business bank account under the LLC name
- 6Update all contracts, invoices, and payment accounts to the LLC name
- 7Decide whether to elect S-Corp taxation (talk to a tax professional first)
Liability Protection Explained
Scenario A: Sole Proprietorship
Your product injures a customer. They sue for $200,000. As a sole proprietor, your personal savings, your house, your car, and your other assets are all on the line. There is no legal boundary between you and the business.
Scenario B: LLC
Same situation, but you operate as an LLC. Only the LLC's assets (business bank account, equipment, inventory) are at risk. Your personal savings, house, and car are protected.
The Catch: Piercing the Corporate Veil
Liability protection only works if you treat the LLC as a separate entity. Courts can "pierce the corporate veil" and hold you personally liable if you:
- -Commingle personal and business funds (use one bank account for both)
- -Fail to maintain proper records and operating agreements
- -Use the LLC to commit fraud or misrepresent the business
How to Get Started
Start a Sole Proprietorship
- 1Start working. That is it. You are a sole proprietor.
- 2File a DBA ("Doing Business As") if using a business name ($10-$50)
- 3Get any required local business licences
- 4Open a separate bank account (recommended, not required)
- 5Track income and expenses for Schedule C at tax time
Form an LLC
- 1Choose your state and pick a business name (check availability)
- 2File Articles of Organization online with your Secretary of State
- 3Write an Operating Agreement (even for single-member LLCs)
- 4Get an EIN from the IRS (free, 5 minutes online)
- 5Open a dedicated business bank account
- 6Determine your tax election (default pass-through or S-Corp)
- 7File annual reports as required by your state
Common Myths Debunked
"I need an LLC to freelance"
"An LLC means I pay less tax"
"Sole proprietors cannot hire employees"
"I should form my LLC in Delaware or Wyoming"
"An LLC protects me from everything"
"I can switch from sole prop to LLC later with no hassle"
Frequently Asked Questions
What is the difference between a sole proprietorship and an LLC?
Is an LLC better than a sole proprietorship?
How much does it cost to form an LLC?
Do I need an LLC to freelance?
When should I convert from sole proprietorship to LLC?
Does an LLC save money on taxes?
Which states have the cheapest LLC fees?
Can a sole proprietor have employees?
Disclaimer: This site provides general information about business structures for educational purposes only. It is not legal, tax, or financial advice. Business structure decisions depend on your individual circumstances. Consult a qualified attorney or tax professional before making any decisions about your business structure.