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The difference starts with paperwork. A sole proprietorship is what you are by default when you work for yourself and file nothing. An LLC is a company you create by filing with a state. That one filing is what gives an LLC its main advantage, a business that is legally separate from you, and its main cost, a state fee to form and usually a yearly report. This page compares the two in general terms. It is not legal or tax advice.
At a glance
| Sole proprietorship | Single-member LLC | |
|---|---|---|
| How it starts | Automatically, when you start doing business | Articles of organization filed with the state |
| State fee | None to exist | A filing fee, plus a yearly report in most states |
| Separate from you | No | Yes, a legal person of its own |
| Personal liability | You can be held personally liable | Owners are generally not personally liable |
| Default federal tax | Schedule C on your own Form 1040 | Disregarded: also on your own return |
| Trading name | Your own name, or a DBA | The LLC's name, or a DBA |
Forming each one
The SBA's guide to choosing a business structure says "You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business." There is nothing to file with the Secretary of State.
An LLC is different. You pick a name that meets the state's rules, appoint a registered agent and file articles of organization or a certificate of formation. The fee and the yearly report depend on the state. Our state guides list them with sources, for example California, Texas and New York, and LLC fees by state puts them side by side.
Liability, in general terms
This is the reason most people form an LLC. The SBA says sole proprietorships "do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business."
For LLCs, the same SBA guide says they "protect you from personal liability in most instances." It names a vehicle, a house and savings accounts as the kind of personal assets that stay out of reach if the LLC "faces bankruptcy or lawsuits." Note the words "in most instances." The SBA adds elsewhere that the protection from an LLC "has limits," and suggests business insurance to cover gaps. Courts and state law decide the edges, so an attorney is the right person to ask about your own risk.
Names and DBAs
A sole proprietor trades under their own legal name unless they register another one. The SBA's page on choosing your business name explains that a DBA is "also known as a trade name, fictitious name, or assumed name," and that you might need to register it "with the state, county, or city your business is located in." It is plain about what a DBA does not do: "Registering your DBA name doesn’t provide legal protection by itself."
An LLC's name is registered when you form it, and the state checks it against other companies on its register. An LLC can also file a DBA to trade under a second name. To see whether a trading name is already taken in your area, use our DBA search guide.
Taxes, in general terms
By default the two are taxed much the same at the federal level.
The IRS sole proprietorships page says "A sole proprietor is someone who owns an unincorporated business by themselves." Profit goes on Schedule C with your Form 1040, and self-employment tax goes on Schedule SE. The IRS self-employment tax page says you must pay it and file Schedule SE if your "net earnings from self-employment (excluding church employee income) were $400 or more."
A one-member LLC is "disregarded" for income tax unless it elects otherwise, so its activity goes on the same forms. The IRS single-member LLC page lists Schedule C among them. The tax difference only appears if the LLC chooses another treatment, such as S corporation status. Our LLC vs S corp page explains that election.
Your state may tax LLCs in its own way, for example through a franchise or privilege tax, even when the IRS ignores the LLC.
Choosing between them
A sole proprietorship suits a low-risk side business or a trial run. The SBA calls it "a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business." An LLC suits you better once there is something to protect: contracts, staff, premises or real money at stake. It also helps with banks, since a separate company account keeps the records clean.
If you decide to form, check the name first with our LLC name search, then use the start form below.
A DBA only registers a name. Read DBA vs LLC to see the difference.