{"id":5510,"date":"2021-08-13T09:17:33","date_gmt":"2021-08-13T14:17:33","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/starting-a-business\/sole-proprietorship-vs-llc.html"},"modified":"2026-05-08T00:33:00","modified_gmt":"2026-05-08T05:33:00","slug":"sole-proprietorship-vs-llc","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/starting-a-business\/sole-proprietorship-vs-llc.html","title":{"rendered":"Sole Proprietorship vs. LLC"},"content":{"rendered":"\n
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Sole Proprietorship vs. LLC<\/h1>\n\n
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\n By Acacia Wilson, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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A sole proprietorship is an unincorporated business owned by one person, while a limited liability company (LLC) is a separate business from the owner, providing personal liability protection from the debts and obligations of a business. There are pros and cons to each, but often an LLC is a good choice for entrepreneurs.<\/p>\n\n <\/div>\n\n\n\n

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Sole Proprietorship vs. LLC<\/h2>\n

If you\u2019re thinking of starting up a new business<\/span>, you\u2019re probably wondering what type of <\/span>business<\/span> structure<\/span> is best for you. Or if you even need to create a business structure<\/span>, for that matter. There are many differences between sole proprietorships<\/span>, limited liability companies<\/span>, and other business entities<\/span>.<\/p>\n

One of the significant differences between the types of <\/span>business<\/span> structure<\/span> is the legal protection<\/span> that an owner can get. The process required to form business entities<\/span> also varies, depending on which formation structure you choose. Another big difference has to do with income tax.<\/p>\n

Personal Liability<\/span> for Business Debts<\/span><\/h2>\n

It\u2019s a good idea for entrepreneurs<\/span> to protect their personal assets<\/span> when they start up a new business<\/span>. Sometimes businesses go into debt or owe money to a person or company. If the person or company decides to file a lawsuit against the business, they may be able to go after the owner\u2019s personal assets<\/span> rather than just the business assets<\/span>. But certain types of <\/span>business<\/span> entities<\/span> offer limited liability. This means that the business is responsible for debts, and personal assets<\/span> are protected.<\/p>\n

A\u00a0limited liability company<\/span> (LLC)<\/a>\u00a0provides personal <\/span>liability<\/span> protection<\/span>. This is because a limited liability company<\/span> is a separate legal entity<\/span>. Personal assets<\/span> and business assets<\/span> are kept separate. An LLC owner\u2019s personal assets<\/span>, such as a bank account<\/span> or car, are protected if there is a business debt<\/span> or obligation. If the LLC has more than one member, each member also has limited liability for the conduct of other members.<\/p>\n

If you don\u2019t form a legal business entity<\/span>, your business is a\u00a0sole proprietorship<\/span><\/a>\u00a0by default (or a partnership if you have one or more business partners). Sole proprietorships<\/span> and partnerships do not offer the same personal <\/span>liability<\/span> protection<\/span>.<\/p>\n

If you conduct business as a sole proprietor<\/span>, you will not have limited liability. This means sole proprietors<\/span> can lose their personal assets<\/span> because of business debts<\/span> or obligations. It could be essential to consider how much risk is in your kind of business<\/span> and decide on the liability protection<\/span> that you need.<\/p>\n

Why would you choose a sole proprietorship<\/span> instead of an LLC? A small business owner<\/span> may worry about the costs or difficulty of forming an LLC<\/a>. A sole proprietorship<\/span> is easier and cheaper to create because it\u2019s automatic.<\/p>\n

Forming an LLC<\/h2>\n

There are many steps that you must take to form a limited liability company<\/span><\/a> (LLC). One of the first steps is to decide on a name for your legal entity<\/span>. It could be a good idea to do a search to make sure that the name you want for your company is not already in use.<\/p>\n

Another step that you must take is to file articles of organization<\/span> for your business. The business name<\/span> and the location of the business should be in the articles of organization<\/span>. The articles of organization<\/span> also show the name of the registered agent<\/span>. A registered agent<\/span> is a person or company that accepts legal documents for your business.<\/p>\n

An LLC<\/a> operating agreement<\/span> is another important document. In this document, you lay out the rules for the organization. It can help to have this document if there are any disagreements about management or ownership of the organization. Typically, an LLC owner does not have to file the operating agreement<\/span> with the state or other agency.<\/p>\n

LLC owners must also file annual reports<\/span> in many states. These compliance rules are governed by state law. Failing to comply can cause your business to lose “good standing” with the state, resulting in fees and other problems.<\/p>\n

When you form an LLC, you have to pay a fee when you file the articles of organization<\/span> with the Secretary of State<\/span>. Filing fees<\/span> are different in different states. Your filing fee<\/span> could be as low as $50, or it could be much higher. There are also annual fees for an LLC in many states. If you choose to use a company for registered agent<\/span> services, there is a cost for this service, though many people find the price to be worth the benefit they get.<\/p>\n

Forming a Sole Proprietorship<\/span><\/h2>\n

If you wish to form a sole proprietorship<\/span>, you can do so without filing documents with the state. This means that you will not have to pay filing fees<\/span>. However, deciding on a name for your business is still an essential part of the process if you want to use something other than your name.<\/p>\n

In a sole proprietorship<\/span>, the person\u2019s legal name<\/span> is the business name<\/span> by default. You may have to do a DBA<\/span> (doing business<\/span> as) filing to do business under a different name.<\/p>\n

A DBA<\/span> filing will allow you to do business under a name other than your name. Some sole proprietors<\/span> choose to use a fictitious business name<\/span> because it seems more professional. Other sole proprietors<\/span> choose to use assumed names so that they can keep their personal names private. There is a filing fee<\/span> for registering a fictitious business name<\/span>.<\/p>\n

Business Structures<\/span> and Tax Returns<\/span><\/h2>\n

The type of <\/span>business<\/span> structure<\/span> that you choose for your business could affect your income tax. For tax purposes, a sole proprietorship<\/span> and an LLC are similar. With sole proprietorships<\/span> and limited liability companies<\/span>, income passes through the business to the owner\u2019s personal tax return<\/span>.<\/p>\n

There is an important difference between the taxation of a sole proprietorship<\/span> and an LLC. If you are the owner of an LLC, the IRS<\/span> will let you choose if you want to be taxed as a corporation. If you do not choose to be taxed as a corporation, the IRS<\/span> will tax your LLC as a sole proprietorship<\/span> or partnership.<\/p>\n

The difference between sole proprietorship<\/span> and partnership status is the number of members in the LLC. Sole proprietorship<\/span> status is for single-member limited liability companies<\/span>. A multi-member LLC will have partnership status under the tax code.<\/p>\n

There are two types of\u00a0corporations<\/a>\u00a0that an LLC can choose from for tax purposes:\u00a0S-corporation<\/span><\/a>\u00a0and C-corporation<\/span>. The name for these types of corporations comes from the section of the tax code that covers them. It could be important to note that an S-corp<\/span> is not a legal entity<\/span>. An S-corporation<\/span> is only a status for tax purposes.<\/p>\n

For an LLC to be taxed as a C-corporation<\/span> or S-corporation<\/span>, the owner must file forms with the IRS<\/span>. You might be wondering why an LLC owner would want to have S-corp<\/span> or C-corp<\/span> status. Some LLC owners wish to have S-corp<\/span> status because it can save them money. If you are an LLC owner with S-corp<\/span> status for business tax<\/span> purposes, you may be able to report some earnings as\u00a0dividends<\/a>. There is no\u00a0employment tax<\/a>\u00a0on these dividends. This means that you can save on Medicare<\/span> and other types of taxes.<\/p>\n\n\n\n\n\n\n\n\n\n
\u00a0<\/td>\nSole Proprietorship<\/strong><\/td>\nLimited Liability Company<\/strong><\/td>\n<\/tr>\n
Legal Status<\/td>\nNot a legal entity<\/span> but an unincorporated business<\/span>, owner and business are same.<\/td>\nSeparate legal entity<\/span> from owners.<\/td>\n<\/tr>\n
Personal Liability<\/td>\nUnlimited liability. Personal assets<\/span> can be used to pay business debts<\/span><\/td>\nLimited liability. Personal assets<\/span> protected from business debts.<\/span><\/td>\n<\/tr>\n
Costs<\/td>\nCreated when you start business operations, minimal paperwork.<\/td>\nFiling fees<\/span> for LLC registration in state, possible registered agent<\/span> fee.<\/td>\n<\/tr>\n
Ongoing Legal Requirements<\/td>\nMinimal.<\/td>\nMay need to file annual or biennial reports with state.<\/td>\n<\/tr>\n
Default Tax Treatment<\/td>\nBusiness income<\/span> reported on owner\u2019s personal tax return.<\/span><\/td>\nPass-through entity<\/span>, a single-member LLC<\/span> reports business income<\/span> on personal income <\/span>tax return.<\/span><\/td>\n<\/tr>\n
Tax Flexibility<\/td>\nNo option to be taxed as a corporation.<\/span><\/td>\nCan elect to be taxed as S-corporation or C-corporation.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Considering Forming a Business? A Local Attorney Could Help<\/h2>\n

You may wish to help decide what type of business structure is right for you and your small business. An attorney could consider your business needs and help you make the best decision.\u00a0Contact a business lawyer<\/a>\u00a0in your area who can help.<\/p>\n

Looking to start your own business? Use FindLaw’s DIY forms<\/a>\u00a0to get a legal business entity set up in minutes.<\/p>\n

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