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LLC vs. Sole Proprietorship

Deciding between an LLC and a sole proprietorship? Learn the pros and cons of each business type to choose the best fit for your small business.

It depends on what you’re looking for.

People choose between these two structures for different reasons. Some prefer the simple setup of a sole proprietorship. Others want the more formal structure of an LLC.

There isn’t one “right” choice for everyone—each option has its own features, costs, and responsibilities.

Both structures are used every day by small business owners, and each has pros and cons worth knowing before you move forward. The right choice depends on what matters most for your situation.

Pros and Cons of an LLC

PROS

CONS

Personal asset protection: If your business is sued, the company is responsible—not you personally (unless you break the law or ignore the rules). Your house, car, and savings are usually safe.
Tax flexibility: You can choose how you get taxed. The default is pass-through, like a sole proprietorship, but you can also pick S-Corp or C-Corp taxes.
Multiple owners allowed: You can have one owner or many—they’re called members.
Easier to bring on partners or investors: LLCs often look more professional to customers, banks, and investors. Some banks even prefer lending to LLCs over sole proprietors.

Startup and maintenance fees: Some fees are required to form the LLC and maintain it.
Requires some paperwork: You’ll need to create documents like an Operating Agreement, file annual reports, etc., to start and stay compliant.
Separate finances: You must keep business and personal finances separate. Using one account for both can destroy your liability protection.

Pros and Cons of a Sole Proprietorship

PROS

CONS

No setup required: Nothing required to start.
No registration fees: Since there is no official registration, formation fees generally do not apply.
Minimal paperwork: Sole proprietors do not file business-specific compliance documents.
Simple tax reporting: Business income is reported directly on your personal tax return.

No liability protection: If your business is sued or goes into debt, they can come after you personally—your bank account, your car, your assets, maybe even your house.
Personal assets at risk: Creditors and lawsuits don’t stop at your business; they can take from your personal savings.
Harder to get investors or raise money: Some banks or investors prefer working with registered business entities instead of sole proprietorships.

LLCs vs. Sole Proprietorships in Real-Life Scenarios

These examples show how different business owners might think about an LLC vs. sole proprietorship. These are not recommendations—just common situations people review before choosing a structure.

Example 1: Handmade soap seller (solo).
A hobby seller might start as a sole proprietorship because there’s no setup, but they still may want to explore forming an LLC because customer products can involve more responsibility.

Example 2: Small landscaping company.
Landscaping usually involves equipment and work on customer property (so there may be a significant risk of accidents). Often, owners look into registering an LLC to get liability protection. (Also, some states or jurisdictions may require you to register before you can get insurance.)

Example 3: Online tutor.
A sole proprietorship is a common choice for businesses with no employees that are just starting out, but you’re still exposed if a client ever sues.

Example 4: Two friends starting a coffee shop.
Shops with staff, a location, and equipment often choose a formal structure—such as an LLC—for protection and clarity.

LLCs and Sole Proprietorships: Myths and Truths

Myth: “LLCs don’t pay taxes.”
Truth: LLCs still pay taxes—usually through the owners’ returns (unless taxed as a corporation).

Myth: “Sole proprietors can’t get an EIN.”
Truth: They can! In fact, it’s often a good idea.

Myth: “LLC = no paperwork.”
Truth: Less than a corporation, yes, but there is still paperwork.

Myth: “If I have insurance, I don’t need an LLC.”
Truth: Insurance and business structures serve different roles. Insurance does not replace the liability protection of an LLC.

LLC vs. Sole Proprietorship: Key Differences

TOPIC	SOLE PROPRIETORSHIP	LLC
Paperwork	No formal formation documents, but basic licenses and permits may apply.	Articles of Organization, Operating Agreement, annual filings and fees, etc.
Legal protection	No legal distinction between owner and business. In other words, you may be personally responsible.	LLC is a separate business entity offering limited liability protection.
Taxes	Income reported on personal tax return (Schedule C).	The default is pass-through. But you can choose to be taxed like an S-Corp or C-Corp.
Owners	One owner only.	One or more members.
Ongoing rules	Few rules: very simple recordkeeping.	Annual reports and fees in many states; must keep business and personal finances separate.
Credibility	Can look “less official” to banks/investors and even potential employees.	Often seen as more legitimate and trustworthy.

A sole proprietorship is often the simplest way to start a business because no formal filing is required. Many people choose this approach when they want a quick start or when their business is still very small. An LLC involves more steps and costs, but it also creates a separate legal business entity. Some owners prefer the structure and flexibility that an LLC provides as their responsibilities grow. Both structures are widely used. When comparing an LLC vs. sole proprietorship, people often think about costs, paperwork, formality, and how they want to manage their business over time.

Remember, pick what fits today, and adjust as your business grows. And if you need help, Rocket Lawyer can guide you through filing.

Key Takeaways

A sole proprietorship gives you no liability protection—if your business gets sued or owes money, they can take your house, car, and savings.
An LLC protects your personal assets, so usually only the business is responsible if something goes wrong.
Sole proprietorships are cheap and easy to start, but they make you take on all the risk.
LLCs cost more and need more paperwork, but they look more professional and help you grow safely.

Published on 11/20/2025Written by Rocket Lawyer editorial staffReviewed by Legal Pros

At Rocket Lawyer, we follow a rigorous editorial policy to ensure every article is helpful, clear, and as accurate and up-to-date as possible. This page was created, edited and reviewed by trained editorial staff who specialize in translating complex legal topics into plain language, then reviewed by experienced Legal Pros—licensed attorneys and paralegals—to ensure legal accuracy.

Please note: This page offers general legal information, but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.

Disclosures

This page offers general legal information, not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.