LLC vs Sole Proprietorship: Which Is Right for You?
A sole proprietorship costs nothing to start but leaves your personal assets exposed to every business liability. An LLC costs $35–$500 to form and creates a legal wall between you and your business. For most freelancers and small business owners with clients or revenue, that wall is worth it.
By Edmond Hui · Last updated: January 2026
LLC vs Sole Proprietorship: Side-by-Side Comparison
| Factor | LLC | Sole Proprietorship |
|---|---|---|
| Liability protection | Yes — personal assets protected | None — personal assets at risk |
| Formation cost | $35–$500 state filing fee | $0 — no registration required |
| Federal income tax | Pass-through (same as sole prop by default) | Pass-through to Schedule C |
| Self-employment tax | 15.3% on net profit (same as sole prop) | 15.3% on net profit |
| Annual ongoing fees | $0–$500/yr (state annual report) | $0 ongoing state fees |
| Business bank account | Required to maintain liability shield | Recommended but not required |
| Business name protection | Name reserved with SoS upon formation | No automatic name protection |
| Ability to raise investment | Can add members or convert to corporation | Limited — investors rarely fund sole props |
| Credibility | "LLC" suffix signals established business | No entity suffix — less formal |
When Should You Choose an LLC?
- You have paying clients or signed contracts — one dispute can become a lawsuit
- You work in a high-liability field (construction, healthcare, consulting, food service)
- You want to open a dedicated business bank account and build business credit
- You plan to eventually hire employees or bring on a business partner
When Is a Sole Proprietorship Acceptable?
- You are testing a business idea with zero revenue and no client contracts yet
- Your business has extremely low liability risk and no physical products
- You intend to form an LLC within the next few months as revenue grows
Frequently Asked Questions
Is an LLC better than a sole proprietorship?
For most freelancers and small business owners with any revenue or clients, yes. An LLC separates your personal assets from business liabilities. A lawsuit, unpaid debt, or client dispute cannot reach your personal bank account, home, or savings once you form an LLC. A sole proprietorship offers zero separation — you and the business are legally the same entity.
Does forming an LLC reduce my self-employment tax?
Not by itself. A single-member LLC is taxed as a disregarded entity by default — the same as a sole proprietorship — and you owe 15.3% SE tax on all net profit. To reduce SE tax, you must elect S-Corp tax treatment (available after forming an LLC), pay yourself a reasonable salary, and take remaining profit as a distribution not subject to SE tax. This becomes worthwhile around $60,000–$80,000 in annual profit.
How much does it cost to change from a sole proprietorship to an LLC?
You pay the state filing fee for Articles of Organization (ranging from $35 in Montana to $500 in Massachusetts). There is no conversion process — you simply form a new LLC. You then open a new business bank account, update contracts to reflect the LLC name, and obtain a new EIN from the IRS (free). Total out-of-pocket cost is typically $50–$600 depending on your state.
Can a sole proprietorship have employees?
Yes. A sole proprietor can hire employees, obtain an EIN, and run payroll. However, you still have full personal liability for employment-related claims — wage disputes, workplace injuries, or discrimination suits — which an LLC would shield you from.
Do I need to register a sole proprietorship?
In most states, no. A sole proprietorship begins automatically when you start conducting business. However, if you operate under a name other than your legal name, you may need to file a DBA ("doing business as") registration with your county or state. An LLC, by contrast, must be formally registered with the state Secretary of State.
LLC vs Sole Proprietorship by State
Costs, taxes, and requirements vary by state. Find state-specific guidance below.