LLC Vs. Sole Proprietorship: What’s The Difference? (2026)

What a Sole Proprietorship Is

A sole proprietorship is the default structure when an individual conducts business. In a sole proprietorship, there is no distinction between the owner’s personal and business activities.

What an LLC Is

An LLC is formed under state law. This entity exists distinctly from the owner, separating personal and business interests.

Liability Protection Compared

A sole proprietorship offers no liability protection for the owner’s personal assets. Since the business is not distinct from the owner, the owner’s assets are exposed to the business’s liabilities and debts.

One of the key benefits of an LLC is liability protection. The owner’s personal assets, like their house or personal vehicle, are not exposed to the LLC’s debts and legal liabilities.

However, this protection can be overcome by piercing the corporate veil. A court can remove the LLC’s protections if the owner disregarded corporate formalities. In other words, a court can effectively treat an LLC like a sole proprietorship if that is how the owner treated it.

Tax Differences Between the Two

The IRS default position for both a sole proprietorship and a single-member LLC is pass-through taxation, where there are no sole proprietorship or LLC taxes. Instead, the owner reports the business’s profits on their personal tax return and pays any associated income taxes.

However, a sole proprietorship is stuck with this default position. By contrast, a single-member LLC can choose between corporate and pass-through taxation.

Under corporate taxation, the LLC pays income taxes. The owner only pays taxes on the salary or profit distribution they receive from the LLC. An owner may choose corporate taxation when they want to leave the profits in the LLC for future investments and purchases.

Setup Requirements and Costs

Sole proprietorships cost nothing to set up. Moreover, no filing is required. A sole proprietorship exists when someone operates a business without forming an entity.

LLCs require money and effort to create. To form an LLC, an organizer must file Articles of Organization or Articles of Formation, depending on the state. Most states charge a filing fee. The LLC needs an Employer Identification Number (EIN) from the IRS. Finally, most states require an annual filing, including a tax or renewal fee, to keep the LLC active.

Which Structure Is Right for You?

The right structure for your business depends on your specific needs. A sole proprietorship requires little effort or cost to create, but it provides no protection or tax flexibility. An LLC takes time, effort, and work to create, but it protects the owner’s assets and provides tax options.

How to Switch From Sole Proprietor to LLC

Switching to an LLC simply requires filing Articles of Organization with the state and paying the fee. When the LLC is accepted, conduct business in the LLC’s name.