Sole Proprietorship
Formation and Dissolution
No paperwork is required to get started. But you’ll need to obtain business permits
Operations, Employment, and Management
Single owner with complete decision making power
Taxes and Business Expenses
Owner claims business income and expenses on personal taxes
Legal Protection
Owner is personally responsible for business debts and claims
Paperwork and Compliance
Keep up with taxes and business licenses
Formation and Dissolution
Must file articles of organization, obtain permits, and must also file for dissolution with the secretary of state
Operations, Employment, and Management
All owners have a say in the decision making, which includes the option to appoint a manager to handle decisions for the LLC
Taxes and Business Expenses
Owner can claim business net income on personal taxes, or choose to have the business taxed separately
Legal Protection
Owner is generally not personally liable for business obligations
Paperwork and Compliance
Pay taxes, maintain business licenses, file annual reports

Sole Proprietorship and LLC - Similarities and Differences

Sole proprietorships and LLCs are both ways to operate your business. Here’s a breakdown of the similarities and differences.

Sole Proprietorship vs LLC: Formation and Dissolution

When getting started with either business structure, here’s what to do:

  • LLC: You’ll need to file articles of organization to create a new business entity with your state. After filing the paperwork with your state, you’ll need to apply for an EIN from the IRS for tax purposes. To dissolve the LLC, you’ll file a form with the state. 
  • Sole proprietorship: A sole proprietorship doesn't require any formal paperwork to get started. However, you may need to obtain permits and licenses based on the nature of your business. If you decide to get an EIN from the IRS, dissolving the business is as simple as sending a letter with your intentions to the IRS. 
  • Similarities: In either case, you’ll get your business up and running. Both structures are required to register their DBA if using one. 
  • Differences: You’ll encounter more steps and some annual maintenance  to form an LLC. 

Sole Proprietorship vs LLC: Operations, Employment, and  Management

Once the business is open, here’s what to expect with a sole proprietorship:

  • Operations: As a sole proprietor, all of the decisions are up to you. The size and speed of the operation are at your discretion. 
  • Employment: You can hire employees based on your needs if you have an EIN.  
  • Management: You can manage everything yourself or hire the appropriate employees to handle the day-to-day. 

If you are opening an LLC, things will look a little bit different:

  • Operations: The operations of your business may be defined in an operating agreement. Typically, an operating agreement covers each owner’s stake, profit sharing, and voting rights. If multiple members are involved, you’ll have to work together to build the business
  • Employment: As with a sole proprietorship, you can hire employees based on your needs. 
  • Management: The owners can appoint a manager to run the business operations. As an owner, you can choose to be in charge of the day-to-day or hire the right employees. 

Ultimately, sole proprietors enjoy more control over their business operations. But an LLC might benefit from the input of multiple members. 

Sole Proprietorship vs LLC: Taxes and Business Expenses

When earning income through a business, taxes come into play.

Here’s the tax situation for a sole proprietorship:

  • The business itself doesn’t pay taxes. Instead, the owner will report business income on a Schedule C attached to their personal tax return. See self-employed tax reliefs for more details. 
  • So, you’ll be responsible for paying taxes on the business income. But you’ll be able to deduct business expenses on your tax return as well. 
  • This is considered a pass-through entity. 

Here’s the tax situation for an LLC:

  • The business itself has the option to choose an S-corp or C-corp tax status. 
  • With the C-corp status, the LLC will pay income taxes for itself. This corporation status can mean access to more tax deductions and credits. But some states levy additional taxes on C-corps. 
  • With an S-corp status, the business owners will treat it as a pass-through entity and pay taxes on business earnings on their personal business tax return. 

An LLC has more opportunities to control its tax returns compared to a sole proprietorship, which has less tax flexibility. But in the end, Uncle Sam will take a cut. Both business structures demand that business owners cover self-employment taxes. 

Sole Proprietorship vs LLC: Legal Protection

Once the business is open, here’s what legal protections you’ll have.

  • Sole proprietorship: A business owner is not legally separate from a sole proprietorship. With that, the owner is personally liable for all business debts and lawsuits. 
  • LLC: An LLC is a legal entity that’s separate from the business owner. With that, the owner isn’t generally personally responsible for business debts. And in most cases, your personal assets are protected in the event of a lawsuit. 

Sole Proprietorship vs LLC: Paperwork and Compliance

The paperwork and compliance responsibilities of these business types vary.

  • Sole proprietorship: A sole proprietor will need to keep track of their tax obligations and maintain business permits. 
  • LLC: An LLC owner will have to keep track of taxes, maintain business permits, file articles of organization, file annual reports, and potentially hold meetings with the other owners. 

The difference between sole proprietor and LLC in terms of paperwork is that you’ll find more required paperwork with an LLC.

Pros and Cons of Sole Proprietorship vs LLC

Each business structure comes with its own set of considerations.

Pros and Cons of Sole Proprietorship

Let’s explore the advantages and disadvantages of a sole proprietorship.

Starting with the advantages:

  • Minimal paperwork requirements: You won’t need to file any paperwork to form a sole proprietorship. Plus, there is no annual filing requirement. 
  • Low cost: You won’t need to pay any fees to start a sole proprietorship. 
  • Streamlined tax filing: You won’t need to file taxes separately for your business. 

Now for the disadvantages:

  • Personal liabilities: You are personally responsible for the debts and lawsuits against a sole proprietorship. 
  • Difficult to raise funds: Without a separate legal entity, it can be difficult to find investors. 

Pros and Cons of LLC

Let’s explore the advantages and disadvantages of an LLC.

Starting with the advantages:

  • Liability protection: Your personal assets are protected from business debts and lawsuits. 
  • Easier to raise funds: The separate legal entity makes it easier to work with investors. 

Now for the disadvantages:

  • More paperwork requirements: Beyond the initial filing, you’ll need to file annual reports. Plus, you’ll have to file a separate tax return for your business. 
  • Additional taxes: As an LLC, the business income might be subject to state business and unemployment taxes. 

If you are interested in transferring from a sole proprietorship to an LLC see how to change from sole proprietorship to LLC for more details.

Sole Proprietorship or LLC: Which is Better?

Neither a sole proprietorship nor LLC is inherently better than the other. Instead, the right choice depends on your needs. If you find yourself saying yes to the questions below, then seriously consider forming an LLC. 

Do You Need Personal Liability Protection?

One of the major benefits of an LLC vs a sole proprietorship is the liabilities involves. An LLC offers personal liability protection than a sole proprietorship cannot. If your business involves risks or you have significant personal assets, then consider an LLC. Essentially all doctors and lawyers form LLCs. 

Do You Plan to Grow Your Business?

If you plan to significantly grow your business, that usually involves more risks and the need for capital. As you grow, consider forming an LLC to mitigate the risks to your personal assets and to have greater access to funding

Will You Be Employing Staff?

Both businesses can hire employees. But as you bring on more employees, your liabilities increase. For example, if someone gets hurt on the job, the LLC or sole proprietor would be responsible. So, if you are planning to hire employees, then consider an LLC.

Do You Want Additional Tax Benefits?

A sole proprietorship doesn’t have many tax optimization solutions. But with an LLC, you can customize the structure to enjoy tax benefits. 

Are You Interested in Branding Your Business?

In general, an LLC lends more credibility to a business. If you want to build a brand for your business, then consider registering as an LLC. 

FAQs About Sole Proprietorships and LLCs

Is a single-member LLC the same as a sole proprietorship?

No, a single-member LLC vs sole proprietorship is not the same. A single-member LLC is a separate legal entity from the owner. With a sole proprietorship, there is no legal separation between the owner and the business.

Are LLCs and corporations the same thing?

The difference between an LLC and a corporation lies in its ownership. An LLC is owned by one or more people. But a corporation is owned by shareholders. Corporations can have unequal ownership percentages, LLC members are equal owners.

Can you convert a sole proprietorship into an LLC?

Yes. If you are already operating your business as a sole proprietorship, then you can convert it into an LLC by filing the appropriate forms with your state.

When should a sole proprietor become an LLC?

A sole proprietor should become an LLC when the owner no longer feels comfortable with the level of liability involved. For example, you might not be comfortable with any personal liability. In that case, you should form an LLC immediately. 

Do you need an LLC for an online business?

You don’t necessarily need an LLC to run an online business. It’s okay to start an online business as a sole proprietor. But you might decide to form an LLC at some point.

How much does it cost to open an LLC?

The cost of forming an LLC varies widely based on your state. You may pay from $50 to over $500 to open an LLC. Additionally, most states require an annual report that involves a fee to file, as well as a separate tax return.

Do you need to register your business name as a sole proprietor or LLC?

Unless you are doing business under your own name, you should register your business name. You can register this name with the state.

Final Word

The key difference between sole proprietorship and LLC lies in the liabilities for the owner. An LLC provides a level of legal protection for your personal assets that a sole proprietorship cannot. If you want to create a level of protection for your personal assets, then move forward with forming an LLC.

About the Authors

Sarah Sharkey

Written by: Sarah Sharkey

Freelance Finance Writer

Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. Sarah enjoys traveling, hiking and reading when she is not writing.

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Joe Templin

Reviewed by: Joe Templin

ChFC - Charted Financial Consultant

Joe Templin is a Charted Financial Consultant (ChFC), MCEC, CEC, CLU and CAP with well over three decades consulting, coaching, and teaching. He's an author of the Amazon Kindle #1 New Release "Every Day Excellence" and host of The Human Kaizen Podcast.

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Kal Salem

Fact checked by: Kal Salem

MA Accounting - Arizona State University

A CPA and finance professional working with small businesses to educate owners and grow alongside their businesses. He holds a Masters in Accounting and a BS in Supply Chain Management. Owner at Salem CPA Services LLC.

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