LLC vs. sole proprietorship

Does an LLC protect your personal assets better than a sole proprietorship?

Yes, in most cases. The SBA describes an LLC as a separate entity that protects owners from personal liability in most instances, and describes a sole proprietorship as a business where the owner can be held personally liable for business debts.¹

A sole proprietorship has no legal existence apart from the person running it. If the business can't pay its debts and obligations, creditors can look to the owner personally. An LLC puts a separate legal person between the business and the owner, so business debts are, as a starting rule, the LLC's to pay.

Note the SBA's wording: "in most instances." Its summary does not list the exceptions, and an attorney can explain how they apply in a given state. The what is an LLC guide explains the structure itself in more depth.

How are an LLC and a sole proprietorship taxed?

By default, a single-member LLC and a sole proprietorship are taxed the same way at the federal level. The IRS treats the one-owner LLC as disregarded as separate from its owner by default, so its profit lands on the owner's personal return.²

This is the pass-through treatment the SBA mentions: profits and losses can pass through to personal income without corporate taxes. Neither structure pays a separate federal income tax as a business by default. The owner pays income tax on the profit at their own rates.¹

Self-employment tax is the same too. The IRS rate is 15.3%, made up of Social Security and Medicare tax, and a single-member LLC owner pays it the same way as a sole proprietor. The IRS filing requirement for it starts at net earnings of $400 or more from self-employment. Forming an LLC does not, on its own, change that bill.³

Two things can change the picture.

1. A second owner. The IRS says a domestic LLC with at least two members is a partnership by default, and such an LLC files Form 1065, U.S. Return of Partnership Income. The single-member vs multi-member guide covers it.^{4, 5}
2. An election. An LLC can file Form 8832, Entity Classification Election to choose how it is classified, and an entity eligible to elect corporate treatment (such as an LLC) can elect S status by filing Form 2553, without a separate Form 8832. A sole proprietorship has no entity to make that election. Whether an election helps depends on the owner's numbers, so talk to a tax professional about yours; the S corporation election guide lists the IRS rules.^{5, 6}

State LLC fees and taxes are where the two structures differ in cost. The next section shows how.

How much more does an LLC cost than a sole proprietorship?

An LLC costs at least its state filing fee, with a median of $100 across the states we track, plus any yearly report fee or LLC tax. A sole proprietorship skips the formation fee entirely.

The table below lists each state's filing fee for a new LLC. That is the one-time cost a sole proprietor never pays.

50 of 51 states publish this in the official sources we checked. Each state's page has the full detail.

The low end includes Montana at $35 and Kentucky at $40. At the other end, Texas charges $300 and Massachusetts $500.^{7, 8, 9, 10}

The yearly charges vary more than the filing fee. Some states charge little for the yearly report: Pennsylvania's annual report is $7 and Montana's is $0 if filed January 1 to April 15 (fee waived). Kentucky's report is $15, though the state also has a Limited Liability Entity Tax (LLET), minimum $175 per year, with exemptions set out in the statute. Others cost far more. Massachusetts bills $500 every year for its annual report. Florida's report is $138.75.^{10, 11, 12, 13, 14, 15}

Then there are state taxes aimed at LLCs. California charges an $800 annual LLC tax to every LLC doing business or organized there, on top of its $20 Statement of Information. Delaware charges a $400 annual LLC tax, due on or before June 1. A sole proprietor in either state doesn't pay these LLC charges, because there is no LLC.^{16, 17, 18}

Our LLC cost guide breaks down every fee in the first and second year, and the state fees table lists each recurring fee next to the filing fee.

What does a formation service add to the cost?

A service is optional. You can file the LLC yourself for the state fee alone, or pay a provider to prepare and submit it.

Plan prices start at $0 plus state fees at ZenBusiness and $39 + state fees at Northwest. Some plans include items that bill later; at Northwest, the included registered agent renews at $125/yr after year 1. The cheapest formation services list and the plan comparison show what each plan costs over time, and the cost calculator adds your state's fees to each plan. Weighing a service against filing it yourself is covered in the DIY vs service guide.^{19, 20}

Which states make an LLC cost more each year?

The states with an LLC tax or a large annual fee widen the gap the most. California, Massachusetts and Delaware are three clear cases in our records; New York adds a one-time publication step.

• California: an $800 annual LLC tax paid to the Franchise Tax Board, plus a biennial Statement of Information. See forming an LLC in California.¹⁶
• Massachusetts: $500 for the annual report, the same as its $500 filing fee.¹⁰
• Delaware: a $400 annual LLC tax, due on or before June 1, though the state requires no annual report. See forming an LLC in Delaware.¹⁸
• Texas: no franchise tax due at or below the revenue threshold, but an information report is still required each year. See forming an LLC in Texas.²¹

New York sets its own extra step, in the state's words: Publish the Articles or a notice in two newspapers chosen by the county clerk for six consecutive weeks. The LLC must then file a Certificate of Publication ($50) within 120 days. Newspaper charges for that notice aren't in our records, but they come on top of the $200 filing fee.^{22, 23}

Wyoming sits near the low end, with a $100 filing fee and an annual report license tax of $60 minimum. See forming an LLC in Wyoming. The best state for an LLC guide compares forming at home with forming in Delaware, Wyoming or Nevada, including the foreign registration you'd need back home.^{24, 25}

How much paperwork does each structure need?

A sole proprietorship needs the least. There is no entity to form, no registered agent to name and no state report to file, though local licenses and a trade name filing can still apply.

An owner who trades under a name other than their own may need to register it as a DBA ("doing business as"), depending on the state or county. BizFilings, for example, sells that filing from $159 + state/county fees. An LLC's own legal name is set when it forms.²⁶

An LLC adds a short list of filings and ongoing tasks.

• File the formation document with the state. The step-by-step formation guide walks through it.
• Keep a registered agent, the person or company named to receive legal papers. The registered agent guide covers who can serve.
• File the state's annual or biennial report and pay its fee on time. The annual report guide has due dates.
• Keep an operating agreement, the document that sets out how the LLC is run. The operating agreement guide covers which states require one.

An EIN, the federal tax number, costs the same for both. It is free; the IRS never charges a fee for an EIN. For a one-owner LLC, the IRS says a single-member LLC needs its own EIN if it has any employees or must file certain excise tax forms; otherwise it generally uses the owner's SSN or EIN for income tax. The EIN guide has the details.^{2, 27}

What weighs on the choice between the two?

The trade is liability against cost. The SBA describes the LLC's shield against personal liability, and the state's filing fee and yearly charges are the cost of keeping that shield.

A sole proprietorship has no state formation fee and no state report. The trade-off, in the SBA's words, is that the owner can be held personally liable for business debts.¹

The liability point carries more weight for a business that signs leases, hires, takes on debt or deals with customers who could sue. A likely second owner is another factor, because an LLC can add members and the IRS default for a two-member LLC is set out above. In a state like Pennsylvania, where the yearly report is $7, keeping the LLC costs little. In California, the $800 annual LLC tax is a real yearly cost to weigh against the protection.^{11, 16}

Switching later is possible. A sole proprietor can form an LLC at any time and move the business into it. The state fees table lists the filing fee and the recurring report for each state; for the legal and tax side of a specific business, an attorney or tax professional can help.