Sole Proprietorship vs LLC: A Guide to Tax Benefits & Liabilities


Instead, you start the business by simply providing work for clients. This popular choice for single-owner businesses offers simplicity in starting and operating the business. You’ll control all aspects so you can make daily business decisions, keep all profits and even change the business’ direction as you’d like. In addition, you can still hire workers like you could with a more formal structure. A sole proprietorship is a business you own and don’t have to formally register with the government in a particular way.

pay taxes

An employer Identification Number is a federal identification number that is given to all business entities. Sole proprietorships have the benefits of an LLC without any extra-legal and tax complexities. LLCs offer an extra layer of protection against liability and other issues, but they also come with a higher cost to set up. Although LLCs are usually pass-through tax entities on the federal level, several states have additional taxes for LLCs on the state level. Learn about when companies expand across state lines and the potential need for “foreign qualification” requirements. This article explores what defines a UBO, why UBO reporting is important, and why conducting UBO due diligence is critical to mitigating risk in global corporate transactions.

Is a single-member LLC the same as a sole proprietorship?

LLC’s have very little restrictions regarding the company’s structure. You decide if you want your business to be a single member LLC, multi-member LLC, and so on. The owners or members of an LLC are free to choose whether the owners or designated managers run the business and how many member they want. They qualify for pass-through taxation – meaning that profits are only taxed once.


The corporation is a separate entity that files its own tax return and pays its own taxes. Corporate federal income tax rates are not set in graduated tax brackets, and in many states, corporations also are subject to franchise taxes—a state corporate income tax, in essence. However, a sole proprietor without any separate financial accounts could be wasting too much time juggling business and personal paperwork at tax time.

Registering your business as an LLC vs. Sole Proprietorship

Similarly, with a single-member LLC, you can do business under the legal name of the LLC, which is the name on its formation document. You may struggle to raise money because, with a sole proprietorship, you can’t sell stock. Banks are also often reluctant to lend to sole proprietorships, making it difficult to get a loan. An LLC is subject to state formation fees, as well as ongoing fees such as annual report fees and franchise taxes.

  • Your multi-member LLC will help protect your personal assets and the assets of the LLC members.
  • Limited liability companies are popular due to their basic benefits of liability protection and are typically used by a sole proprietor or a company with two or more owners .
  • You are about the begin your new journey by starting a new venture.

For instance, if you move your Llcs Vs Sole Proprietorships Vs. Other Business Entities’s principal office, you’ll typically have to file a form to let your state know of the address change. What if you’ve decided you’ve had enough of being the boss and decide to close the business? In a sole proprietorship, your business ends when you stop working. If you have an LLC, you’ll have to submit paperwork and pay a fee to formally dissolve your business . This means that all profits pass through the business and onto your personal tax return.

Who Pays More Taxes, an LLC or S Corp?

An LLC provides the liability protection that a sole proprietorship does not and you still get the pass-through taxation benefits. The business owner and the sole proprietorship are essentially the same, thus making the owner responsible for any and all liabilities incurred by the business entity. An LLC is a business structure designed to protect business owners from being personally liable for the company’s debts or other liabilities.

  • Costs for forming and completing a tax return for an LLC are higher than those of forming a sole proprietor.
  • These issues include exposure to liability and at what rate and manner you and your business are taxed.
  • If you’re planning to operate your business as a sole proprietorship, you can absolutely convert your sole proprietorship into an LLC to take advantage of liability protection and other benefits.
  • You don’t need to file anything with the state, other than to cancel your DBA and other licenses/permits you may be using.
  • Perhaps the biggest difference between a sole proprietorship and an LLC is the issue of limited liability protection.
  • When deciding between a sole proprietorship vs. LLC, the first thing to consider is how you want to set up your company structure.