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 to $520 to form and generally keeps business debts separate from your personal assets. It does not protect you from claims over your own work or mistakes.
By Edmond Hui · Last updated: October 2026
LLC vs Sole Proprietorship: Side-by-Side Comparison
| Factor | LLC | Sole Proprietorship |
|---|---|---|
| Liability protection | Business debts generally kept separate from personal assets | None. You are personally responsible for business debts |
| Formation cost | $35 to $520 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 92.35% of net profit (same as sole prop) | 15.3% on 92.35% of net profit |
| Annual ongoing fees | Annual or biennial report fee in most states, varies by state | $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 |
This choice is more common than it looks. The Census Bureau counts 30,427,808 U.S. businesses with no employees, and the large majority are unincorporated sole proprietorships operating without any liability protection. They average $57,611 in annual receipts, a useful gut-check: weigh a $35 to $520 formation fee, plus the annual or biennial report fee most states charge, against the business debts you could otherwise owe personally. (Source: U.S. Census Bureau, Nonemployer Statistics (NES), 2023.)
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
Is an LLC Worth It for Your Industry?
Use this calculator to see your break-even year and 5-year liability protection value, personalized to your industry and state.
Frequently Asked Questions
LLC vs Sole Proprietorship by State
Costs, taxes, and requirements vary by state. Find state-specific guidance below.
This guide is general information, not legal or tax advice, and reading it does not create an attorney-client relationship. It describes rules that can differ from state to state, and fees, rates, forms and deadlines can change after we review them. It cannot tell you what applies to your own business: that turns on where the business is formed, where it operates and how it is taxed. Confirm anything you rely on with the state or federal agency concerned, or with a licensed attorney or CPA, before you act on it.
Edmond Hui · Founder, MyStateLLC
Edmond Hui is a software engineer and serial entrepreneur based in New York who has founded multiple online businesses across e-commerce, media, and information publishing. Before transitioning into tech, he spent years as a commercial real estate professional closing deals totaling over 100,000 square feet, giving him firsthand experience with business formation and entity structuring. He built MyStateLLC to provide the free, state-specific LLC guidance he wished existed when forming his own companies.