If you start selling something on your own without registering anything, you are already a sole proprietor. An LLC is the next step up: it costs a state filing fee, but it separates the business from you personally. For most founders the question is not "which one?" but "when should I switch?"
1. The key difference: personal liability
A sole proprietorship is not a separate legal entity — you and the business are the same person. If the business is sued or cannot pay a debt, your personal savings, car and home can be at risk.
An LLC (limited liability company) is a separate legal entity. In general, the business's debts and lawsuits stay with the LLC, and your personal assets are protected — as long as you keep business and personal money separate and run the LLC properly.
2. Side-by-side comparison
| Sole proprietorship | LLC | |
|---|---|---|
| Setup | None — exists as soon as you start | File with the state |
| Cost | Free (a DBA name may cost a small fee) | State filing fee plus any yearly report |
| Personal liability | Unlimited — personal assets at risk | Generally limited to the business |
| Default federal tax | Schedule C on your Form 1040 | Same for one owner (Schedule C) |
| Self-employment tax | 15.3% | 15.3% by default; S-Corp election can reduce it |
| Business bank account | Possible, but often personal | Expected — with an EIN |
| Credibility | Looks like a freelancer | Looks like a company |
3. How each is taxed
For a single owner, federal income tax is almost identical by default. The IRS treats a single-member LLC as a "disregarded entity", reported on Schedule C of your personal return, and the owner pays self-employment tax "in the same manner as a sole proprietorship". Self-employment tax is 15.3% — 12.4% for Social Security and 2.9% for Medicare.
The difference is flexibility. An LLC can choose to be taxed as an S corporation, which lets you pay yourself a reasonable salary and take the rest of the profit as distributions that are not subject to self-employment tax. A sole proprietorship cannot do that. See how to elect S-Corp status for an LLC.
Some states also charge LLCs a yearly fee or tax that sole proprietors do not pay. Check your state page before you decide.
4. When a sole proprietorship is enough
- You are testing an idea with very little money involved.
- The work carries little risk of lawsuits or large debts.
- You have no partners, employees or business contracts yet.
5. When to form an LLC
- You sign contracts with clients, suppliers or landlords.
- You sell physical products, give advice, or do work that could cause a claim.
- You want a business bank account, a payment processor or a marketplace account in the company's name.
- You have a partner — an LLC with an operating agreement sets out who owns what.
- Your profit is growing and an S-Corp election could save tax.
- You live outside the US — a sole proprietorship is not a practical way to do business in the US from abroad, while an LLC is. See starting a US LLC as a non-resident.
6. How to switch
There is no conversion form — you simply form a new LLC and move the business into it: get an EIN, open a business bank account, and move contracts, domains and accounts into the LLC's name. If you used a DBA as a sole proprietor, you can file a DBA for the LLC too.
Incofile prepares and files your LLC, and the Gold and Platinum packages include your EIN. Compare packages or start your LLC.
Incofile is not a law firm or tax adviser. IRS facts from irs.gov, September 2026. Liability protection depends on state law and on how the LLC is run.