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.
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.
Quick answer:Form an LLC if you have clients, revenue, or any business risk. The filing fee is a one-time cost that buys permanent liability protection. Stay a sole proprietor only if you are still testing an idea with zero revenue and no client contracts yet.
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
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: at that revenue level, a $35–$500 formation fee plus a $0–$200 annual report is a small price for putting a legal wall between one client dispute and your personal savings. The higher your receipts and the more clients you carry, the more clearly the LLC's annual fees pay for themselves. (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
For most freelancers and small business owners with any paying clients or contracts, yes. An LLC creates a legal separation between your personal assets and your business liabilities. A lawsuit, unpaid debt, or client dispute cannot reach your personal bank account, home, savings, or retirement funds once you properly maintain an LLC. A sole proprietorship offers zero separation — you and the business are legally the same entity. Every liability your business incurs is directly your personal liability. The cost of that protection is the state filing fee, typically $35–$500 depending on your state, plus an annual report fee of $0–$200. That is a one-time or annual cost that buys permanent legal separation.
Not by itself. A single-member LLC is taxed as a disregarded entity by default — exactly the same as a sole proprietorship — and you owe 15.3% self-employment tax on all net profit. The LLC itself does not reduce taxes. To reduce self-employment tax, you must layer an S-Corp tax election on top of your LLC by filing IRS Form 2553. With S-Corp status, you pay yourself a reasonable salary (subject to SE tax) and take the remaining profit as a distribution (exempt from SE tax). The savings typically run $3,000–$10,000 per year once profit exceeds $60,000–$80,000 — enough to offset the payroll and accounting overhead.
There is no conversion process for a sole proprietorship to an LLC — you simply form a new LLC. The main cost is the state filing fee for Articles of Organization, which ranges from $35 in Montana and Kentucky to $500 in Massachusetts and Tennessee. After forming the LLC, you open a new business bank account in the LLC's name, update existing contracts and vendor relationships to reflect the LLC, and obtain an Employer Identification Number from the IRS at no cost (file online at IRS.gov in minutes). You may also want a simple operating agreement, which you can draft yourself or purchase for $30–$100. Total out-of-pocket cost is typically $100–$700 depending on your state.
Yes. A sole proprietor can hire employees, obtain an EIN, and run payroll. Federal and state employment laws apply to sole proprietors the same as any other employer — minimum wage, overtime, workers' compensation, and tax withholding requirements all apply. The key difference is liability: as a sole proprietor, you have full personal liability for all employment-related claims — wage disputes, workplace injuries, wrongful termination lawsuits, or discrimination claims. An LLC would shield your personal assets from those claims, keeping any judgment against the business rather than against you personally. For this reason, most business owners form an LLC before making their first hire.
In most states, no formal registration is required. A sole proprietorship begins automatically when you start conducting business. However, if you operate under a business name other than your own legal name, most states require a DBA ('doing business as') registration with your county or state — typically a $25–$100 filing. Some professions also require local business licenses regardless of entity type. An LLC, by contrast, must be formally registered with the state Secretary of State by filing Articles of Organization and paying the filing fee. The LLC registration is what creates the legal separation between the business and you personally — the DBA filing for a sole proprietorship provides a name only, with no liability protection.
LLC vs Sole Proprietorship by State
Costs, taxes, and requirements vary by state. Find state-specific guidance below.
