The difference in one line
A sole proprietor is someone who owns an unincorporated business by themselves: no filing creates it, and the business and its owner are legally the same person. An LLC is a company the state registers when you file its articles of organization, legally separate from you even when you're its only member.
Side by side
| Sole proprietorship | Single-member LLC | |
|---|---|---|
| How it starts | Automatically, when you start doing business alone | When the state files your articles of organization |
| State fees | None, apart from a DBA if you use another name, and local licenses | A filing fee, and in most states a yearly or two-yearly report |
| Business name | Your own legal name, or a registered DBA | The LLC's name on the state register, protected there from identical filings |
| Business debts | Yours personally | Generally the LLC's, not yours |
| Federal income tax | Profit on your Schedule C | The same by default: profit on your Schedule C |
| Self-employment tax | 15.3% on net earnings of $400 or more | The same by default |
| Bank account | Can be your personal one | Should be the LLC's own, to keep the shield |
| Selling or passing it on | Its assets can be sold; the business itself isn't an entity | The membership interest can be sold or transferred |
The tax is the same until you elect
The IRS treats an LLC with one member as a disregarded entity unless it elects otherwise, so its income goes on the owner's own return exactly as a sole proprietor's does: Schedule C for the profit, Schedule SE for self-employment tax, and quarterly estimated payments. Forming an LLC on its own doesn't change your federal tax. Electing to be taxed as an S corporation can, for an owner with steady profit; see LLC vs S corp.
An LLC is still a separate entity for employment taxes and certain excise taxes, so once it has employees it needs its own EIN.
What the LLC protects
As a sole proprietor you owe the business's debts and judgments yourself: a creditor of the business is your creditor. An LLC's debts are generally its own, so a creditor of the LLC can collect from what the LLC owns but not from your home or savings. The shield doesn't cover harm you cause yourself, or debts you personally guarantee, and it holds only while you keep the LLC's money separate from yours. See what an LLC's shield covers.
What the LLC costs
The state's fee to file the articles runs from $35 to $500, by the articles of organization table, and most states then ask for a report every year or two, some with an annual tax: our annual report guide lists each state's. A sole proprietor pays none of this, though a DBA filing and local business licenses apply to both.
When a sole proprietorship is enough
- The business carries little risk of debts or lawsuits, and has no employees or large contracts.
- You're testing an idea before committing to it.
- You'll trade under your own name, or are happy to register a DBA.
When to form the LLC
- Customers, clients or landlords could hold the business responsible for something that goes wrong.
- You'll sign leases, hire, or borrow in the business's name.
- You want a business name the state registers, and a business you can sell or bring a partner into.
Sources
- Sole proprietorships, IRS
- Single member limited liability companies, IRS
- Self-employment tax (Social Security and Medicare taxes), IRS
- State filing fees, reports and DBA filings: our state guides, from each office's own pages.
Common questions
Is an LLC better than a sole proprietorship?
It protects more: an LLC's debts are generally its own, while a sole proprietor owes the business's debts personally. It also costs more, a filing fee and usually a yearly report, so a sole proprietorship can be enough for a small, low-risk business.
Does an LLC pay less tax than a sole proprietorship?
Not by default. The IRS treats a one-member LLC as a disregarded entity, so its profit goes on the owner's Schedule C and owes self-employment tax just like a sole proprietor's. The tax changes only if the LLC elects to be taxed as a corporation or an S corporation.
Do I need a DBA as a sole proprietor?
If you trade under any name other than your own legal name, most states expect you to register it. 48 of the 51 jurisdictions have a DBA (assumed name) filing, at the state, the county or both; Kansas, New Mexico and South Carolina have none.
Can I turn my sole proprietorship into an LLC?
Yes, by forming an LLC with the state and moving the business into it: its contracts, bank account, licenses and any DBA. A sole proprietorship isn't registered as a company, so there's nothing to convert; the LLC is a new business that takes over the old one.