A sole proprietorship is you doing business on your own: it starts automatically, needs no state filing if you use your legal name, and leaves you personally liable for business debts. An LLC is a separate entity registered with your state that protects you from personal liability in most instances. Both usually pass profit to your personal return, and owners of both pay self-employment tax. ProfitDrawer's startup guides note that the SBA puts typical registration costs under $300.
| Sole proprietorship | LLC | |
|---|---|---|
| How it starts | Automatically when you do business | File with your state, with a registered agent |
| Personal liability | You are personally liable | Protected in most instances |
| Taxes | Personal return plus self-employment tax | Pass-through by default; members pay self-employment tax |
| Cost | No filing if you use your legal name; DBA if not | State filing fee; amount varies by state |
| Paperwork | Least | More, and some states charge yearly fees |
Which fits? A sole proprietorship is simple for testing an idea or a low risk service business. An LLC makes more sense when you have assets to protect, sign leases or contracts, or work in other people's homes and property, though insurance is still needed either way.
Keep business money in a separate account with either structure; it makes records, taxes and any liability protection easier to keep clean.
Rules and fees differ by state, so check your secretary of state's website. General information, not legal or tax advice.
Source: Choose a business structure (U.S. Small Business Administration) · Updated
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General information, not tax, legal or financial advice. Check the rules for your state and your situation.