LLC vs. Sole Proprietorship: Which One Fits When You Start Working for Yourself

If you’re just start­ing out, work­ing alone, and your work car­ries little risk, you can begin as a sole pro­pri­etor. There’s no sep­a­rate com­pa­ny to form, and by de­fault the IRS taxes it the same way it taxes a single-member LLC. But the busi­ness struc­ture doesn’t re­place ev­ery­thing else: a state pro­fes­sion­al li­cense (a nail tech or a ther­a­pist needs one, for ex­am­ple), local per­mits and a DBA may be re­quired either way, and your work au­tho­riza­tion and tax res­i­den­cy are sep­a­rate ques­tions. An LLC makes sense once your risks and rev­enue grow: you touch clients or sell phys­i­cal prod­ucts, you sign leases and bigger con­tracts, or you want a clear wall be­tween the busi­ness and your family’s assets. An LLC on its own doesn’t save taxes. What it gives you is pro­tec­tion and struc­ture.

We cov­ered the me­chan­ics of form­ing a com­pa­ny step by step in Build­ing Your Own Busi­ness in Amer­i­ca. This piece is about the de­ci­sion itself: how the two struc­tures ac­tu­al­ly differ, what each one costs, and when it makes sense to switch.

The two structures in a nutshell

A sole pro­pri­etor­ship is simply you, work­ing for your­self. There’s no sep­a­rate legal entity. If you start get­ting paid for your work and don’t reg­is­ter any­thing else, you’re au­to­mat­i­cal­ly a sole pro­pri­etor. The Small Busi­ness Ad­min­is­tra­tion puts the main draw­back plain­ly: you can be held per­son­al­ly liable for the debts and obli­ga­tions of the busi­ness.

A single-member LLC is a com­pa­ny you form with your state. It’s legal­ly sep­a­rate from you, and ac­cord­ing to the SBA it pro­tects your per­son­al assets, like your home and sav­ings, from busi­ness claims in most in­stances. For fed­er­al income tax, though, the IRS by de­fault treats it as dis­re­gard­ed as sep­a­rate from its owner, so its income and ex­pens­es go on your per­son­al return.

Side by side: sole proprietorship vs. single-member LLC

The big myth: “An LLC will lower my taxes”

Not by itself, and not at first. The IRS says an in­di­vid­u­al who owns a single-member LLC and op­er­ates a busi­ness pays self-em­ploy­ment tax the same way a sole pro­pri­etor does. The rate is 15.3%: 12.4% for Social Se­cu­ri­ty and 2.9% for Medi­care. It kicks in once your net self-em­ploy­ment earn­ings reach $400 for the year. For 2026, the Social Se­cu­ri­ty part ap­plies to the first $184,500 of earn­ings, and Medi­care has no cap. Reg­u­lar fed­er­al income tax comes on top, plus state income tax in most states.

So the useful ques­tion isn’t which struc­ture is taxed less. It’s what you ac­tu­al­ly keep. Our self-em­ploy­ment tax cal­cu­la­tor shows the SE tax bite, and the hourly rate cal­cu­la­tor helps you price your time so the math works.

Where an LLC can help with taxes: the S-corp election

An LLC has one option a sole pro­pri­etor­ship doesn’t: it can elect to be taxed as an S cor­po­ra­tion by filing Form 2553. The dead­line is no more than 2 months and 15 days after the start of the tax year you want the elec­tion to take effect. You then become an em­ploy­ee of your own com­pa­ny. Pay­roll taxes apply to your salary, and re­main­ing profit can be taken as dis­tri­bu­tions that aren’t sub­ject to self-em­ploy­ment tax.

The catch: the IRS re­quires that S cor­po­ra­tions pay rea­son­able com­pen­sa­tion to a share­hold­er-em­ploy­ee for their work. You also take on pay­roll, a sep­a­rate busi­ness tax return and higher ac­count­ing fees, which can easily eat up the sav­ings while prof­its are modest. And not every LLC can elect S-corp status: for ex­am­ple, a non­res­i­dent alien can’t be an S cor­po­ra­tion share­hold­er. Elect­ing S-corp status is a con­ver­sa­tion to have with a CPA using your real num­bers. It doesn’t belong on a day-one check­list.

When a sole proprietorship is enough

• You’re test­ing an idea and aren’t sure it will become your main income.
• You work online or with­out phys­i­cal con­tact: coach­ing, con­sult­ing, trans­la­tion, design, tu­tor­ing.
• Your risks are low, your con­tracts are small and you have no em­ploy­ees.
• You don’t have sig­nif­i­cant assets to shield, or you cover your risks with in­sur­ance.

Even then, do three things. Open a sep­a­rate bank ac­count. Get a free EIN from the IRS so you’re not hand­ing your Social Se­cu­ri­ty number to every client. And reg­is­ter a DBA if you work under a brand name. In Flor­i­da, a fic­ti­tious name reg­is­tra­tion costs $50 and lasts five years.

When an LLC makes sense

• You work hands-on with clients. Beauty ser­vices, mas­sage and es­thet­ics are fields where claims really happen.
• You sell phys­i­cal prod­ucts. Hand­made skin­care, can­dles, food and kids’ items carry prod­uct li­a­bil­i­ty risk.
• You sign leases and larger con­tracts. A salon chair, a studio, or work for cor­po­rate clients.
• You have a family and assets. A home, sav­ings and col­lege funds are worth keep­ing apart from busi­ness risk.
• You’re build­ing a brand. Cor­po­rate clients and plat­forms are often more com­fort­able work­ing with a com­pa­ny, and your LLC’s name is on record with the state.

Know the limits, too. An LLC won’t pro­tect you from your own pro­fes­sion­al mis­takes; that’s what pro­fes­sion­al li­a­bil­i­ty in­sur­ance is for. And if you mix per­son­al and busi­ness money, a court may refuse to re­spect the sep­a­ra­tion. A ded­i­cat­ed ac­count and clean books are part of the deal.

What an LLC costs: three very different states

Fees vary widely, so com­pare the full yearly cost of own­er­ship, not just the filing fee.

Flor­i­da. For­ma­tion costs $125: $100 to file plus $25 to des­ig­nate a reg­is­tered agent. The annual report is $138.75, or $538.75 if it ar­rives after May 1, a $400 penal­ty.

New York. Filing Ar­ti­cles of Or­ga­ni­za­tion costs $200. The catch is the pub­li­ca­tion re­quire­ment. Within 120 days, you must pub­lish a notice of for­ma­tion in two news­pa­pers des­ig­nat­ed by the county clerk for six con­sec­u­tive weeks, then file a Cer­tifi­cate of Pub­li­ca­tion with a $50 fee. The news­pa­pers bill sep­a­rate­ly, and rates depend on the county. Miss the dead­line and the LLC’s au­thor­i­ty to do busi­ness is sus­pend­ed. A $9 Bi­en­ni­al State­ment is due every two years.

Cal­i­for­nia. For­ma­tion costs $70, plus a $20 State­ment of In­for­ma­tion within 90 days and every two years after. The big line item is the $800 annual tax, owed by every LLC or­ga­nized or doing busi­ness in the state even if it isn’t op­er­at­ing. The first-year ex­emp­tion only cov­ered tax years 2021 through 2023. If your Cal­i­for­nia income reach­es $250,000, an ad­di­tion­al LLC fee starts at $900.

Immigration status: confirm your right to work first

Owning a com­pa­ny and work­ing in it are two dif­fer­ent things. Cit­i­zens and green card hold­ers can run a busi­ness in either struc­ture. On many tem­po­rary sta­tus­es, you may be able to reg­is­ter an LLC on paper, but ac­tive­ly pro­vid­ing ser­vices and earn­ing income from it can be a dif­fer­ent matter with­out work au­tho­riza­tion. Both a sole pro­pri­etor­ship and an LLC mean work­ing for your­self, so the ques­tion ap­plies to both.

This isn’t legal advice: if you’re on a tem­po­rary visa or wait­ing on a status de­ci­sion, talk to an im­mi­gra­tion at­tor­ney before you reg­is­ter any­thing.

One more bound­ary: the tax com­par­i­son in this ar­ti­cle as­sumes the owner is a US tax res­i­dent. Non­res­i­dents play by dif­fer­ent rules — for ex­am­ple, self-em­ploy­ment tax gen­er­al­ly doesn’t apply to non­res­i­dent aliens, and a single-member LLC owned by a for­eign person usu­al­ly files Form 5472 with a pro forma Form 1120 each year. The BOI ex­emp­tion doesn’t change that tax filing — check your sit­u­a­tion with a CPA.

What about BOI reporting?

In 2024, small busi­ness owners heard a lot about a new ben­e­fi­cial own­er­ship in­for­ma­tion (BOI) report to FinCEN. That’s changed. In March 2025, FinCEN ex­empt­ed com­pa­nies cre­at­ed in the US, and on August 11, 2026, it issued a final rule that made the ex­emp­tion per­ma­nent, ef­fec­tive August 14, 2026. Only for­eign com­pa­nies reg­is­tered to do busi­ness in the US still have to report. If your US LLC gets a letter de­mand­ing a paid BOI filing, treat it with sus­pi­cion and check FinCEN’s site.

Questions to bring to your CPA and attorney

1. Do you have work au­tho­riza­tion? If you’re not sure, see an at­tor­ney first.
2. Does your work need a state li­cense or a local permit? That doesn’t depend on your busi­ness struc­ture.
3. Are you a US tax res­i­dent? It changes your taxes and your LLC’s fil­ings.
4. Does your work in­volve phys­i­cal risk to clients, or prod­ucts that could hurt some­one? If so, lean toward an LLC plus in­sur­ance.
5. What does an LLC cost per year in your state, in­clud­ing on­go­ing fees?
6. Will you keep a sep­a­rate ac­count and real books? With­out them, an LLC pro­tects you less.
7. Start­ing as a sole pro­pri­etor and moving to an LLC as you grow is a normal path, not a mis­take.

This ar­ti­cle is for gen­er­al in­for­ma­tion only and is not legal, tax or im­mi­gra­tion advice. Fees and rules re­flect of­fi­cial sources as of Oc­to­ber 2026; verify cur­rent re­quire­ments for your state and talk to a CPA or at­tor­ney about your sit­u­a­tion.

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