Published June 16, 2026
See what your state actually charges.
Filing fees run from $35 to $500 depending where you form.
Open the cost calculatorA sole proprietorship costs nothing to start and works fine for low-risk, low-asset situations. An LLC costs a state filing fee and some ongoing paperwork, and in exchange it walls off your house, your car, and your savings from business debts and lawsuits. Taxes are a wash between the two by default. The decision usually comes down to how much you have to lose and how much risk the work carries.
What a Sole Proprietorship Actually Is
A sole proprietorship is not something you apply for. It is the default status the moment you start selling something, freelancing, or taking on clients without filing anything at the state level. No registration, no articles, no separate entity. You might still need a local business license or a "doing business as" filing if you operate under a trade name instead of your own, but that is a formality, not a structure change.
The legal fact that matters: you and the business are one and the same. Income lands on your personal return, and so does the risk. If the business owes money or loses a lawsuit, creditors are not limited to business assets. They can come after yours.
What an LLC Adds
A limited liability company is a separate legal entity, created by filing articles of organization (some states call it a certificate of formation) with your state and paying a filing fee. Once formed, the LLC, not you personally, is the party that owns the debts, signs the contracts, and gets sued.
That separation is the entire point. A creditor or plaintiff going after the LLC is generally limited to what the LLC owns. Your personal bank account, home, and car sit outside that reach, provided you maintain the LLC properly. A single-member LLC is taxed like a sole proprietorship by default. A multi-member LLC is taxed like a partnership. Either one can later elect S corp tax treatment if the numbers justify it.
The Real Difference: Who Can Come After Your House
This is the reason most owners eventually file. As a sole proprietor, an unpaid vendor, an injured customer, or a client who sues over a bad outcome can reach your personal assets directly. There is no legal wall between you and the business, because there is no separate business to speak of.
With an LLC, that wall exists. A judgment against the business is generally satisfied out of business assets, not your personal ones, as long as you keep the entity intact: separate bank accounts, no mixing of personal and business funds, and no using the LLC as a shell for fraud. Courts call the failure mode "piercing the corporate veil," and it is the main way an LLC's protection actually fails in practice.
The shield is not absolute, and it was never meant to be. But for anyone signing contracts, taking deposits, or working in a field where something can go wrong (construction, consulting, food service, personal training, and similar work), it is protection worth paying a filing fee for.
Taxes Don't Move the Way People Expect
The most common myth about LLCs is that forming one lowers your tax bill. It does not, at least not by itself.
A sole proprietorship and a default single-member LLC are taxed identically. All profit flows to your personal return and gets hit with both income tax and self-employment tax, 15.3 percent on net self-employment earnings up to the Social Security wage base ($184,500 for 2026, per the Social Security Administration), and 2.9 percent Medicare tax on everything above that with no ceiling. The IRS treats a single-member LLC as a "disregarded entity," meaning your Schedule C looks the same whether you filed articles of organization or not.
The one lever that changes the tax math is an S corp election, filed on IRS Form 2553. Under that election, you pay yourself a reasonable salary through payroll, and only the salary owes self-employment-style payroll tax. Profit paid out as distributions above that salary skips the 15.3 percent hit. The catch is that S corp status adds payroll filings, a separate business return, and higher accounting costs, so it tends to pay for itself only once net profit is comfortably above roughly $50,000 a year. Below that, the paperwork usually costs more than it saves.
Cost and Paperwork, Side by Side
Sole proprietorship: free to start, no state filing. A DBA filing for a trade name typically runs $10 to $100 through the county clerk. Ongoing paperwork is close to nothing.
LLC: a state filing fee for articles of organization, ranging from about $35 in Montana to $500 in Massachusetts, depending on the state. Most states also charge an annual report fee or franchise tax to stay in good standing. California's minimum annual franchise tax, for example, runs $800 regardless of whether the business turned a profit. An operating agreement is not always legally required, but skipping one on a single-member LLC is a bad habit to start.
Comparison at a Glance
| Feature | Sole Proprietorship | LLC |
|---|---|---|
| Personal liability protection | None | Yes, with proper maintenance |
| Default tax treatment | Pass-through (Schedule C) | Pass-through (Schedule C) |
| Cost to start | Free (DBA may run $10 to $100) | $35 to $500 in state filing fees |
| Ongoing paperwork | Minimal | Annual report or franchise fee in most states |
| Business banking | Possible, sometimes needs a DBA | Straightforward with formation documents |
When It's Time to Move Off Sole Proprietor
Plenty of people start as sole proprietors while they test whether the business has legs, and that is a reasonable place to sit for a while. A few signals mean it is time to file.
Real financial risk is on the table. Signing contracts, taking client deposits, or working in a field where mistakes cause property damage or injury all raise the stakes enough that the filing fee pays for itself many times over.
You have something worth protecting. A house, savings, or other personal assets sitting exposed behind a sole proprietorship is the whole risk in one sentence. The more you have, the more the LLC earns its cost.
Clients expect a formal entity. Corporate buyers and government contracts often require vendors to operate as a registered business, not an individual.
Profit is climbing. Once net income clears roughly $50,000 a year, it is worth pairing the LLC with a conversation about the S corp election.
Compare the tax math directly.
See self-employment tax under an LLC against the S corp option.
Open the calculator