LLC vs Sole Proprietorship: Key Differences
A sole proprietorship needs no filing. An LLC costs a state fee but can separate your personal assets from the business's debts in many situations.
| Sole proprietorship | LLC | |
|---|---|---|
| State filing | None (unless a trade name or local license is required) | Formation fee and recurring state costs (by state) |
| Personal liability | Owner is personally liable for business debts | Generally limited, if the LLC is run properly and you do not personally guarantee debts |
| Default federal tax | Schedule C | Single-member: same as sole proprietor; multi-member: partnership |
| Paperwork | Minimal | Reports, registered agent, separate bank account |
An LLC does not remove personal liability for your own negligence or for debts you personally guarantee. Ask an attorney if you hold significant assets or take on significant risk. Source for federal tax treatment: IRS.
Frequently asked questions
When should I switch from sole proprietor to LLC?
When the risk of a lawsuit or personal exposure on contracts outweighs the state fees and paperwork.
Want someone else to handle the filing?
A formation service files the paperwork for a fee on top of the state fee and often includes a first year of registered agent service. It saves time, but you can file directly with the state for the state fee alone. Compare DIY and services.
See a formation service (partner link) Sponsored
Related
General information, not legal or tax advice. See our methodology and disclosure.