LLC vs. Sole Proprietorship

The biggest difference is personal liability. A sole proprietorship isn’t a separate legal entity, so you can be held personally liable for the business’s debts. An LLC is an entity you register with your state, and in most cases it keeps your personal assets out of reach if the business is sued or goes bankrupt (SBA). For federal income tax, the default treatment is close to identical. A single-member LLC is a “disregarded entity,” so its owner reports the profit on Schedule C and pays self-employment tax just as a sole proprietor does (IRS). The choice usually comes down to how much risk the business carries and whether that protection is worth the state paperwork and fees.

Side by side

Question	Sole proprietorship	Single-member LLC
How it starts	Automatic when you do business without registering as another type	You file formation documents with your state
Personal liability for business debts	Yes	Protected in most instances
Default federal income tax	Schedule C on your Form 1040	Same: disregarded entity, usually Schedule C
Self-employment tax	Yes	Yes, by default
Can choose corporate or S corp tax treatment	No	Yes, by election
State filings and fees	A DBA only if you use a trade name and your state or locality requires it	Formation filing, a registered agent and any ongoing state requirements

Sources for the table: SBA, IRS.

Liability

With a sole proprietorship, the business’s assets and liabilities are your personal ones, so a business debt is your debt (SBA). The SBA says an LLC protects you from personal liability “in most instances,” so your vehicle, house and savings aren’t at risk if the LLC goes bankrupt or is sued (same source). That protection has limits, and an attorney in your state can tell you where they fall for your kind of work.

The SBA suggests a sole proprietorship can be a good choice for low-risk businesses and for owners who want to test an idea before forming a more formal business. It describes an LLC as a fit for medium- or higher-risk businesses and for owners with significant personal assets they want to protect (same source).

How each is taxed by default

Sole proprietorship

The IRS defines a sole proprietor as someone who owns an unincorporated business by themselves. You report business profit or loss on Schedule C with your Form 1040 and figure self-employment tax on Schedule SE (IRS).

Self-employment tax is 15.3%: 12.4% for Social Security and 2.9% for Medicare. You must pay it and file Schedule SE if your net earnings from self-employment were $400 or more, and you can deduct the employer-equivalent portion when you figure your adjusted gross income (IRS). Because no employer withholds tax from this income, you may need to make quarterly estimated tax payments.

Single-member LLC

Unless it elects otherwise, the IRS treats a one-owner LLC as a disregarded entity for income tax. Its activity goes on the owner’s return, typically on Schedule C, E or F, and an individual owner running a trade or business through it owes self-employment tax “in the same manner as a sole proprietorship.” The IRS does treat it as a separate entity for employment taxes and certain excise taxes (IRS).

So forming an LLC doesn’t by itself lower your federal tax bill. Our guide to reporting side hustle income covers the forms.

LLC with two or more owners

A domestic LLC with at least two members is classified as a partnership for federal income tax by default, unless it files Form 8832 and elects to be treated as a corporation (IRS).

Electing corporate or S corporation tax treatment

An LLC can choose a different tax classification. A sole proprietorship has no such option, and the IRS notes that if you’re the only member of an LLC and elect corporate treatment, you’re no longer a sole proprietor (IRS).

To be taxed as a C corporation, an LLC files Form 8832. The election generally can’t take effect more than 75 days before the date you file it or more than 12 months after (IRS). A corporation’s profit is taxed to the corporation when earned and taxed again to the shareholders when paid out as dividends (IRS). To be taxed as an S corporation, an eligible LLC files Form 2553 and doesn’t need to file Form 8832 separately (IRS). An S corporation passes income, losses, deductions and credits through to its shareholders. It must be a domestic company with no more than 100 shareholders, only allowable shareholders, and only one class of stock (IRS). If you work in the business, the S corporation must pay you reasonable compensation before making any non-wage distributions to you (IRS).

A tax professional can tell you whether an election makes sense for your situation.

Forming and keeping each one

Sole proprietorship

There’s no formation filing. You’re automatically a sole proprietorship if you do business without registering as another type, and if you work under your own legal name you won’t need to register anywhere. If you use a trade name (a “doing business as,” or DBA, name), the SBA says most states require you to register it, and some counties and cities do too (SBA).

LLC

You register with the state, usually the secretary of state’s office, by filing articles of organization. These list the company’s name, address, members and registered agent. Before you file, you need a registered agent located in that state to receive legal papers for the company. The SBA also widely recommends a written operating agreement, even where the state doesn’t require one. If the LLC does business in other states, it may need to register there too (“foreign qualification”) (same source).

Costs depend on the state. The SBA says the total cost to register a business is less than $300 in most cases, but that fees vary by state and business structure (same source). Some states also have ongoing requirements. Delaware, for example, charges LLCs an annual tax due on or before June 1 but doesn’t require an annual report (Delaware Division of Corporations). Check your own secretary of state’s website for current fees and filings. The SBA also notes that many states limit how long an LLC lasts, and that a change in members can require dissolving and re-forming it unless your operating agreement covers transfers (SBA).

EINs

An Employer Identification Number (EIN) is a business’s federal tax ID. The SBA says a business needs one if it pays employees, operates as a corporation or partnership, or files employment, excise, or alcohol, tobacco and firearms tax returns, among a few other cases (SBA).

A one-owner LLC that hasn’t elected corporate treatment uses the owner’s Social Security number or EIN for income tax reporting. It needs its own EIN if it has employees or must file certain excise tax forms, and it can get one to open a bank account or where state law requires it (IRS).

An EIN is free from the IRS, and the agency warns against websites that charge for one. If you’re forming an LLC, form it with your state first, or your EIN application may be delayed (IRS).

Beneficial ownership reporting

U.S. LLCs no longer have to file beneficial ownership information (BOI) reports under the Corporate Transparency Act. FinCEN issued a final rule on August 11, 2026, that made permanent the exemptions in its March 2025 interim final rule, and the rule took effect on August 14, 2026. FinCEN says U.S. companies are exempt from BOI reporting and U.S. persons don’t need to provide BOI to reporting companies (FinCEN). FinCEN also says it will delete BOI that U.S. persons reported earlier (FinCEN). The only companies that still report are those formed under foreign law and registered to do business in a U.S. state or tribal jurisdiction, unless they qualify for an exemption, and they don’t report U.S. persons (FinCEN).

The two official sources don’t match here. The SBA’s business registration page still says many U.S. companies must report BOI and gives a March 21, 2025 deadline (SBA). FinCEN runs BOI reporting, and its rule and BOI page are newer, so FinCEN’s position is the current one.

Which one fits

A sole proprietorship needs no formation filing and suits a low-risk side hustle or an idea you’re still testing. An LLC adds state filings and fees in exchange for liability protection, plus the option to elect a different tax treatment later. Either way, the work of keeping clean records is the same. If the business could injure someone, damage property or take on serious debt, ask an attorney in your state before you decide.