Home › Sole Prop vs LLC

Sole Proprietorship vs LLC: Liability, Taxes, Costs & When to Switch

A sole proprietorship is you doing business in your own name (or a DBA). An LLC is a separate legal entity you form with the state. For a one-owner US business, federal income tax looks similar by default — the big difference is personal liability and state paperwork.

What each structure is

Per the IRS, a sole proprietor owns an unincorporated business by themselves. The SBA notes you are automatically a sole proprietorship if you do business activities and do not register as another entity. Business and personal assets are not separate: you can be held personally liable for business debts.

An LLC is created under state law. The SBA describes it as combining corporation-style liability protection with partnership-style pass-through taxation. Your personal assets (home, car, savings) are generally not at risk for LLC debts or lawsuits — though that protection has limits (see below).

Side-by-side comparison

Taxes: often the same at first

The IRS treats a single-member LLC that does not elect corporate taxation as a disregarded entity. If the owner is an individual, LLC activity generally goes on the same forms a sole prop uses: Schedule C (and Schedule SE for self-employment tax). An individual owner of a disregarded single-member LLC is subject to self-employment tax on net earnings in the same manner as a sole proprietorship.

Self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare), per the IRS. For 2026, the Social Security portion applies to net earnings up to the SSA contribution and benefit base of $184,500 (SSA); Medicare has no wage cap. You generally owe SE tax if net earnings from self-employment are $400 or more.

Forming an LLC alone does not cut that SE tax. The usual path to payroll-tax savings later is electing S-corp taxation (reasonable salary + distributions), which adds payroll and accounting cost — covered in LLC vs S corp.

What an LLC costs

You always pay your state's filing fee, then recurring fees. Among the lowest first-year state costs in our data:

From our all-state fee table (verified 2026-10-11). Your home state is usually cheapest overall if you live and sell there — forming elsewhere often means foreign registration and paying twice. See best state to form an LLC.

Liability protection is real — and not magic

The main reason to form an LLC is the liability shield the SBA describes: personal assets are generally protected if the business is sued or goes bankrupt. Courts can still “pierce the veil” when owners treat the LLC as their personal wallet — for example mixing personal and business funds, undercapitalizing the company, or ignoring basic formalities. Keep a separate bank account, document major decisions, and sign contracts in the LLC's name.

An LLC also does not replace insurance. The SBA notes that structure alone has limits and recommends business insurance (general liability, professional liability, and any coverage your state requires) for risks you could not pay out of pocket.

DBAs for sole proprietors

If you operate under a name other than your legal name, many places require a DBA (doing business as / fictitious name). The SBA explains that a DBA does not create a separate legal entity or give liability protection; it only lets you trade under another name. An LLC's legal name is set when you file; some owners still use a DBA for branding.

How to convert a sole prop to an LLC

1. Pick your state — usually where you live and do business.
2. Choose a distinguishable name that meets that state's LLC naming rules and search the state's business records.
3. Appoint a registered agent with a physical address in that state.
4. File formation documents and pay the state fee (DIY or via a service).
5. Create an operating agreement even as a single member — banks often ask for it and it supports the liability shield.
6. Get tax IDs as needed — see the EIN note below and our EIN guide.
7. Move operations — open a business bank account in the LLC name, update contracts, licenses, and payment processors, and stop mixing personal funds.

EIN note (IRS): You do not automatically need a brand-new EIN just because you formed a single-member LLC. The IRS says you can keep using your sole-proprietor EIN for a disregarded single-member LLC if you do not elect corporate or S-corp taxation and do not have employees or excise-tax liability. Many owners still apply for an LLC EIN because banks require one. You do need a new EIN if the LLC will have employees, owes certain excise taxes, or elects to be taxed as a corporation or S corporation. Details: IRS — When to get a new EIN.

When a sole prop is fine vs when to form an LLC

A sole prop can be enough for low-risk, early testing — freelance writing, simple online services, or hobbies turning into small side income — especially if you have little personal wealth at stake and no employees. The SBA calls sole props a common choice for low-risk businesses and owners testing an idea.

Form an LLC when risk rises: clients on your premises, physical products, employees or contractors, larger contracts, or meaningful personal assets to protect. The SBA lists LLCs as a fit for medium- or higher-risk businesses and owners who want personal assets protected. Also form one when a bank, marketplace, or partner requires an entity, or when you are planning an S-corp election later.

Non-US residents

A classic US sole proprietorship assumes you are an individual operating in the US tax system (often with an SSN/ITIN and local licenses). Non-resident founders without a US home base commonly form a state LLC instead of trying to run a US sole prop the same way. This site's founder, Simon Chan (Hong Kong–based), formed a Wyoming LLC as a non-resident and is documenting that path — see About and our Wyoming LLC guide. Non-US owners generally cannot be S-corp shareholders, so default LLC taxation is the usual starting point.

Sources

• IRS — Sole proprietorships
• IRS — Single-member LLCs
• IRS — Self-employment tax
• IRS — When to get a new EIN
• SSA — Contribution and benefit base (2026: $184,500)
• SBA — Choose a business structure
• LLC Pathfinder — LLC fees by state (official SOS sources, verified 2026-10-11)

FAQ

Last updated 2026-10-12. Not legal or tax advice.