LLC or sole proprietorship? Choosing the right structure when you’re starting out

Audience: startups & freelancers · Focus keyword: LLC vs sole proprietorship

When you’re starting a business, one of the first questions that comes up is what legal structure to use.
For many new business owners, the choice comes down to two options: staying a sole proprietor, or
forming an LLC, short for limited liability company.

Both are common starting points. The right one depends less on how big your business is today and
more on how much risk you’re comfortable carrying personally.

What a sole proprietorship actually is

A sole proprietorship isn’t something you file paperwork to create — it’s simply what you are by default
the moment you start doing business as yourself, without setting up a separate legal entity. If you’re
freelancing, consulting, or selling something under your own name with no formal structure in place,
you’re already a sole proprietor.

This makes it the simplest option by far. There’s no formation paperwork, no separate business tax
return, and no ongoing state filings to keep up with. Your business income and expenses are reported
directly on your personal tax return.

What an LLC actually is

An LLC is a legal entity you form with your state, separate from you personally. It exists specifically to
create a line between your business and your personal finances.

Setting one up involves filing formation documents with your state, paying a filing fee, and — depending
on your state — some ongoing annual requirements to keep the LLC in good standing. It’s more
paperwork than a sole proprietorship, but it’s still far simpler than incorporating.

The main difference: liability protection

This is the heart of the decision. As a sole proprietor, there’s no legal separation between you and your
business — if the business is sued or can’t pay a debt, your personal assets, including your home and
savings, are generally on the table.

An LLC creates a legal barrier between the business and your personal finances. If the business faces a
lawsuit or debt it can’t cover, your personal assets are generally protected, as long as you’ve kept
business and personal finances properly separate.

If your work carries any real risk — client contracts, physical products, professional advice, employees —
that protection is worth taking seriously.

Taxes: often more similar than people expect

Here’s something that surprises a lot of new business owners — for tax purposes, a single-member LLC
is treated exactly like a sole proprietorship by default. Your business income still flows through to your
personal tax return, and you still pay self-employment tax the same way.

Forming an LLC doesn’t automatically change your tax situation. It’s possible to have an LLC taxed as an
S-corp later on, once your income reaches a level where the payroll and paperwork trade-off starts to
pay for itself — that’s a decision for when you get there, not when you’re first forming the LLC. We’ll
cover that choice on its own.

Cost and paperwork

Sole proprietorships cost nothing to start and require minimal ongoing maintenance. LLCs involve a
state filing fee, which varies significantly by state, plus possible annual report fees and, in some states, a
separate annual tax or fee just for existing as an LLC.

Neither option is complicated to maintain once it’s set up — but it’s worth knowing the ongoing cost
before you choose, so there are no surprises later.

So which one is right for you

There’s no universal answer, but a few questions tend to point people in the right direction. How much
personal risk does your work carry? Are you working with clients under contract, handling other
people’s money or property, or in a field where lawsuits are more common? Do you plan to bring on a
business partner, raise money, or grow beyond just yourself?

If the answer to any of these leans toward yes, an LLC is usually worth the extra paperwork. If you’re
testing an idea, working solo with low risk, and want to keep things as simple as possible while you get
started, a sole proprietorship may be enough for now — and you can always form an LLC later as your
business grows.

Working with a CPA who can walk you through it

This decision doesn’t have to be made alone, and it isn’t permanent. A CPA who works with startups and
freelancers regularly can walk through your specific situation, explain what each option actually means
for your taxes and liability, and help you form an LLC correctly if that’s the right call.

Jessie Dong CPA, LLC helps freelancers and new business owners get set up correctly from day one —
entity formation, quarterly taxes, and everything that comes after. Wherever you’re starting from, the
goal is the same: a structure that fits your business now, without overcomplicating things you don’t
need yet.

Book a free consultation — no obligation, no jargon.