# LLC vs sole proprietorship: which is right for your business? > A sole proprietorship is free and simple but leaves your personal assets exposed. An LLC adds liability protection for $50–$500 to start plus yearly fees. Taxes, costs by state, when to switch. - URL: https://2search.in/knowledge/articles/oct-26/llc-vs-sole-proprietorship - Genre: Business - Country: United States - Published: 2026-10-27 - Updated: 2026-10-27 - Publisher: 2search (https://2search.in) > **Quick answer:** A **sole proprietorship** is the default when you start working for yourself — **no paperwork, no fees**, and profit goes on your personal tax return — but **you are personally liable** for business debts and lawsuits. An **LLC** costs about **$50–$500** to form (plus **$0–$800+ a year** depending on the state) and **separates your personal assets** from the business. Taxes are the **same by default** for a single-member LLC; the main reasons to form one are **liability protection, credibility and the option to elect S-corp taxation** later. > **Key takeaways** > - Both pay **self-employment tax (15.3%)** on profit by default — an LLC alone doesn't cut taxes. > - LLC protection only works if you **keep business and personal money separate**. > - State costs vary a lot: **California charges $800 a year**; some states charge **$0–$50**. > - Once profit reaches roughly **$40,000–$60,000+**, an **S-corp election** may save self-employment tax. > - Domestic US companies **no longer need to file BOI reports** with FinCEN after the March 2025 rule change. Choosing a business structure is one of the first decisions you make as a freelancer, consultant or small business owner. This guide compares a sole proprietorship and an LLC on protection, taxes, costs and paperwork — with examples — so you can decide what fits now and when to switch. ![LLC vs sole proprietorship: which is right for your business? Breakdown & Visual Guide](/images/articles/llc-vs-sole-proprietorship/diagram.svg) ## Side-by-side comparison | | **Sole proprietorship** | **Single-member LLC** | | --- | --- | --- | | How to start | Just start; maybe a DBA and local licence | File Articles of Organization with the state | | Formation cost | $0 (DBA often $10–$100) | **$35–$500** state fee | | Yearly cost | Usually none | **$0–$800+** annual report/franchise tax | | Personal liability | **Unlimited** — your savings, home and car are at risk | **Limited** — generally only business assets at risk | | Default federal tax | Schedule C on your 1040 | Same — "disregarded entity", Schedule C | | Self-employment tax | 15.3% on profit (up to the Social Security wage base) | Same, unless you elect S-corp | | S-corp election | Not available | **Available** | | Credibility with clients / banks | Lower | Higher | | Paperwork | Minimal | Operating agreement, annual report, separate bank account | | Ownership changes | Can't add partners | Can add members | ## Liability: the main reason to form an LLC As a sole proprietor, **you and the business are the same person** legally. If a client sues, a customer is injured, or the business can't pay a debt, creditors can go after your **personal assets**. An LLC creates a **separate legal entity**. In general, business debts and lawsuits stay with the LLC. But protection has limits: - **You're still liable for your own negligence** or professional mistakes — that's what **professional liability (E&O) insurance** is for. - **Personal guarantees** on loans or leases make you liable anyway. - Courts can **"pierce the corporate veil"** if you mix personal and business money, don't keep records, or underfund the business. > **Tip:** An LLC and **business insurance** work together. For many freelancers, general liability and professional liability insurance give more practical protection than the LLC alone. ## Taxes: the same — until you elect S-corp By default, a **single-member LLC** is taxed exactly like a sole proprietorship: profit on **Schedule C**, plus **self-employment tax** on **Schedule SE**. Multi-member LLCs are taxed as **partnerships** (Form 1065, K-1s). ### The S-corp option An LLC can elect to be taxed as an **S corporation** (Form 2553). You then: - Pay yourself a **reasonable salary** (with payroll taxes), and - Take the rest as **distributions**, which aren't subject to the 15.3% self-employment tax. > **Example:** Your LLC earns **$100,000** profit. > - **Default:** self-employment tax ≈ 15.3% × 92.35% × $100,000 ≈ **$14,130**. > - **S-corp:** you pay yourself a $60,000 salary → payroll taxes ≈ **$9,180**; the other $40,000 is a distribution. Savings ≈ **$4,950** — minus payroll service and extra tax-prep costs (often $1,000–$3,000 a year). S-corp election usually starts to make sense once **profit is roughly $40,000–$60,000 or more** — talk to a CPA, as "reasonable salary" rules matter. ### The QBI deduction Both sole proprietors and LLC owners can usually claim the **Qualified Business Income (QBI) deduction** — up to **20%** of qualified business income, subject to income limits — which was made permanent in 2025. ## What an LLC costs in popular states | State | Formation fee | Ongoing fee | | --- | --- | --- | | **California** | $70 | **$800** minimum franchise tax every year, plus a fee if revenue > $250,000 | | **Texas** | $300 | Franchise tax report; most small LLCs owe **no tax** | | **Florida** | $125 | $138.75 annual report | | **New York** | $200 | $9 biennial statement + **publication requirement** (often $300–$1,500+ once) | | **Delaware** | $110 | $300 annual tax | | **Wyoming** | $100 | $60 minimum annual report | | **Illinois** | $150 | $75 annual report | | **Massachusetts** | $500 | $500 annual report | | **Kentucky** | $40 | $15 annual report | Fees change — check your **Secretary of State** website. You usually register the LLC in the state **where you live and work**; forming in Delaware or Wyoming doesn't avoid your home state's fees if you do business there. ## How to form an LLC (step by step) 1. **Choose a name** and check it's available on your state's business search. 2. **Pick a registered agent** — yourself (with a physical in-state address) or a service ($50–$300/year). 3. **File Articles of Organization** online with the Secretary of State and pay the fee. 4. **Write an operating agreement** — required in some states, wise in all. 5. **Get an EIN** free from the IRS at **irs.gov** (takes minutes online). 6. **Open a business bank account** and keep all business money there. 7. **Get local licences and permits** your city, county or industry requires. 8. **Register for state taxes** if you sell taxable goods or have employees. 9. **Calendar annual reports and fees** so the LLC stays in good standing. > **Good to know:** After FinCEN's **March 2025** interim rule, **US-formed companies and US persons are exempt** from Beneficial Ownership Information (BOI) reporting under the Corporate Transparency Act. Foreign companies registered to do business in the US may still have to file. ## When a sole proprietorship is fine - You're **testing an idea** or have low income from a side hustle. - Your work has **low liability risk** (writing, design, tutoring) and you carry insurance. - You want **zero setup cost** and paperwork for now. - You'll revisit the decision once income grows. ## When to form an LLC - You have **clients, contracts or physical work** that could lead to lawsuits. - You have **employees** or contractors. - You hold **significant personal assets** (a home, savings). - Clients or platforms **prefer working with a business entity**. - Your profit is approaching the level where an **S-corp election** could save tax. - You plan to **bring in partners** or investors. ## Switching from sole proprietor to LLC 1. Form the LLC (steps above) and get an EIN. 2. Open a new business bank account; move business income and expenses there. 3. Update **contracts, invoices, website and payment platforms** with the LLC name. 4. Transfer business assets (equipment, domain names) to the LLC. 5. Update licences and permits. 6. Keep filing Schedule C (single-member, default) — or file Form 2553 if electing S-corp. ## Frequently asked questions ### Does an LLC save on taxes? Not by default — a single-member LLC is taxed like a sole proprietorship. Savings come from electing S-corp status once profits are high enough. ### Is an LLC worth it for a small side business? It depends on your risk and state costs. In states with low fees, many people form one for protection. In California, the $800 yearly tax makes it a bigger decision. ### Can I be a sole proprietor without registering? Yes, in most places you're automatically a sole proprietor when you start doing business. You may still need a DBA and local licences. ### Does an LLC protect me from everything? No. You're still personally liable for your own negligence, personal guarantees, and if you mix personal and business finances. ### What is the cheapest state to form an LLC? Formation fees are lowest in states like Kentucky and Montana, but you generally should form in the state where you operate. ### Do I need a lawyer to form an LLC? No. Most people file online themselves. A lawyer or CPA is useful for multi-member agreements or S-corp planning. ### Do I need a separate bank account for an LLC? Yes. Mixing personal and business money is the most common way owners lose liability protection. ## Sources - [U.S. Small Business Administration — Choose a business structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure) - [IRS — Single member limited liability companies](https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies) - [IRS — S corporations](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations) - [How to Start an LLC — LLC annual fees by state (2026)](https://howtostartanllc.com/cost-to-form-an-llc/llc-annual-fees-by-state) - [FinCEN — Beneficial ownership information reporting](https://www.fincen.gov/boi)