A sole proprietorship is what you are automatically when you do business on your own without forming an entity: there is nothing to file with the state, and no legal line between you and the business, so you are personally liable for its debts. An LLC takes a state filing and yearly upkeep, and in return is a separate legal entity that keeps business debts away from your personal assets in most cases. For federal income tax, a one-owner LLC is taxed like a sole proprietorship unless it elects otherwise, so the choice is mainly about liability, paperwork and cost.
When a sole proprietorship is enough
The SBA calls a sole proprietorship a good choice for low-risk businesses and for owners testing an idea before forming something more formal. It is also hard to raise money as one: you cannot sell stock in a sole proprietorship, and the SBA notes "banks are hesitant to lend to sole proprietorships".
Side by side, for one owner
| Sole proprietorship | Single-member LLC | |
|---|---|---|
| Formation | None: you are one as soon as you do business alone without registering another structure | Articles of organization filed with the state |
| Liability | You are personally liable for the business's debts and obligations | The owner is generally not personally liable for the LLC's debts |
| Federal income tax | Schedule C on your Form 1040 | The same by default; can elect corporation or S corp tax |
| Self-employment tax | On net earnings, through Schedule SE | The same by default |
| Paperwork | Local licenses, and a DBA if you use a name other than your own | The same, plus the state's yearly report where required and a registered agent |
| Cost | No state formation fee | A state filing fee, and in some states a yearly fee or tax; see LLC cost by state |
Does an LLC pay less tax than a sole proprietorship?
Not by default. The IRS treats a one-member LLC as "disregarded as separate from its owner," and an individual owner reports its income on Schedule C, E or F is subject to self-employment tax "in the same manner as a sole proprietorship" (IRS: single-member LLCs). A sole proprietor files Schedule C and Schedule SE the same way. The tax picture changes only if the LLC elects to be taxed as a corporation or as an S corporation; see LLC vs S corp.
Estimate the self-employment tax
- Net earnings from self-employment (92.35% of profit)
- $0.00
- Social Security, 12.4% up to $184,500
- $0.00
- Medicare, 2.9% on all of it
- $0.00
- Additional Medicare tax, 0.9% above the threshold
- $0.00
- Total
- $0.00
Figures for tax year 2026, checked 2026-10-26: wage base (SSA), rates (IRS Topic 554), additional Medicare tax (IRS Topic 560). Self-employment tax only, not income tax. Not legal or tax advice.
What an LLC protects, and what it does not
| Sole proprietorship | Single-member LLC | |
|---|---|---|
| The business's debts | Yours, personally | The LLC's own |
| Your personal assets | Within reach of the business's creditors | Kept apart from business debts in most cases |
| Federal income tax | Schedule C on your Form 1040 | The same by default |
The shield has limits: your own wrongful acts and the debts you personally guarantee stay yours.
The SBA draws the line this way: a sole proprietor "can be held personally liable for the debts and obligations of the business," while an LLC protects you from personal liability "in most instances" (SBA: choose a business structure). The protection has limits that apply in every state:
- You stay liable for your own wrongful acts, such as your own negligence or professional mistakes.
- A debt you personally guarantee, as many lenders and landlords ask small business owners to do, is yours whatever the structure.
- A court can set the protection aside when an owner treats the LLC as an extension of themselves, for example by mixing personal and business money. A separate bank account and the LLC's name on contracts help keep the line clear.
Insurance covers some of the same risks for a sole proprietor, but it does not separate business debts from personal assets.
Can a sole proprietor use a business name?
Yes, by registering a DBA ("doing business as") where the state or locality requires it. A DBA is only a name: it does not create an entity or add any protection. See what a DBA is and DBA vs LLC.
Do I need an EIN?
A sole proprietor generally needs one only to hire employees, to pay certain excise taxes, or for the other cases on the IRS EIN page; otherwise the owner's Social Security number serves. A single-member LLC follows almost the same rules, except that it must use its own EIN for employment and certain excise taxes. See single-member LLC and how to get an EIN.
Switching from a sole proprietorship to an LLC
- Form the LLC in your state; see how to start an LLC.
- Move the business into it: bank account, contracts, licenses and permits in the LLC's name.
- Check the EIN. The IRS says you do not need a new one if you use your sole proprietor EIN for your single-member LLC, do not choose corporation or S corp taxation, and have no employees or excise tax (IRS: when to get a new EIN).
Before you file, check the name is free on your state's business search, for example on our Texas or New York lookup pages.
General information, not legal or tax advice. Facts checked 2026-10-28 against the official sources linked above; confirm with the state or the IRS before you file. How we check our facts · Report an error