LLC vs Sole Proprietorship

Launching a new business is an exciting step, but it comes with a slew of decisions that can shape your company’s future. One of the most foundational choices you’ll make is your business’s legal structure. While there are several options out there—like corporations or partnerships—most startups in 2025 find themselves deciding between two popular structures: a sole proprietorship or a limited liability company (LLC). Each has its own set of benefits and drawbacks, impacting everything from taxes to legal liability and day-to-day management. Let’s break down what these structures mean, how they differ, and how to pick the one that fits your startup’s needs—keeping it straightforward and practical, around 1200-1500 words.

Understanding the Basics: What Are These Structures?

Before diving into the nitty-gritty, let’s start with what each structure actually is.

A sole proprietorship is the simplest way to start a business. It’s designed for a single owner, meaning if you’re launching a company on your own, this might be your go-to. There’s no legal separation between you and the business—you are the business. That means you keep all the profits, but you’re also on the hook for any debts, losses, or legal issues that come up. If you’re thinking of starting a business with a partner, you’d need to look into a partnership structure instead, which works similarly but lets you split responsibilities and liabilities with others.

An LLC, on the other hand, is a more formal structure that creates a separate legal entity for your business. This means the LLC exists as its own “person” in the eyes of the law, distinct from you as the owner. Whether you’re running the business solo or with a team, an LLC shields your personal assets—like your house or car—from business debts or lawsuits, as long as you’re not engaging in anything shady. To form an LLC, you’ll need to appoint a registered agent—someone to handle legal and tax documents on the LLC’s behalf. In 2025, many founders use services like Northwest Registered Agent for this role, which has a solid reputation for reliability and costs around $100-$150 per year depending on the state.

Sole Proprietorship vs. LLC: Breaking Down the Differences

Both structures have their perks, but they differ in ways that can significantly impact your business. Let’s walk through the key distinctions to help you decide which fits your startup best.

Management Structure: Who’s Calling the Shots?

With a sole proprietorship, you’re the boss—period. Since you’re the only owner, you handle everything: daily operations, big decisions, and everything in between. If you’re launching a small freelance graphic design gig, for example, this simplicity can be a relief. You don’t have to answer to anyone, and there’s no paperwork to formalize your role. It’s just you, running the show however you see fit.

An LLC offers more flexibility but also more structure. You can manage the LLC yourself—called a member-managed LLC—or appoint a manager to handle daily operations, known as a manager-managed LLC. This setup is great if you want to bring in a partner or hire someone to run things while you focus on the big picture, like developing a new app or scaling your e-commerce store. Every LLC needs an operating agreement, a document that spells out who’s in charge, how decisions are made, and what happens if someone wants out. In 2025, most states don’t legally require an operating agreement, but it’s a smart move to have one—it can prevent headaches down the road, especially if you’re working with co-founders.

Legal Liability: Protecting Your Personal Assets

One of the biggest differences between these structures is how they handle legal liability, and this can be a game-changer depending on your business’s risks.

In a sole proprietorship, there’s no separation between you and your business. That means if your company gets sued or can’t pay its debts, your personal assets—like your car, house, or savings—are on the line. Let’s say you’re running a small bakery and a customer sues you after slipping on a wet floor. If they win a $50,000 judgment and your business can’t cover it, they could go after your personal bank account. You’re also liable for any mistakes your employees make—like if a delivery driver causes an accident while working for you. This lack of protection can be a big risk, especially if your business involves physical products, services, or public interaction.

An LLC, however, creates a legal wall between your business and personal assets. If your LLC gets sued, creditors can only go after the company’s assets—like its bank account or equipment—not your personal stuff. For example, if you’re running a tech startup and a client sues for a failed software launch, they can’t touch your house or car as long as you’ve kept your business and personal finances separate. The catch? You have to play by the rules—don’t mix personal and business funds, like using your LLC’s credit card to buy groceries, or a court might “pierce the corporate veil” and hold you personally liable anyway. In 2025, this protection makes LLCs a popular choice for startups in industries with higher risks, like food service, construction, or tech development.

Finances: Keeping Your Money Straight

How you manage your finances is another big difference between these structures. With a sole proprietorship, there’s no separation between your personal and business money. If your freelance photography business makes $5,000 in a month, that money is yours to spend however you want—whether it’s on new camera gear or a weekend getaway. But the downside is that any business debts are your debts too. If you owe $10,000 to a supplier and can’t pay, they can come after your personal savings.

An LLC requires you to keep things separate. You’ll need a business bank account, and you can’t use the LLC’s funds for personal expenses—like paying your rent or buying groceries. This separation is crucial to maintaining the legal protection an LLC offers. If you mix funds, a court might decide your LLC isn’t really a separate entity, and creditors could go after your personal assets. For example, if your LLC earns $20,000 from a client project, that money stays in the business account for business expenses—like hiring a developer or paying for ads—until you pay yourself a salary or distribution. This extra step can feel like a hassle, but it’s a small price to pay for the peace of mind an LLC provides.

Taxes: How You’ll Pay the IRS

Taxes are a big consideration when choosing your structure, and both sole proprietorships and LLCs have their quirks. In a sole proprietorship, your business income is treated as your personal income—a setup called pass-through taxation. Let’s say your consulting business makes $80,000 in 2025. You report that on your personal tax return, and it’s taxed at your individual rate, which could be around 22-24% depending on your total income. You don’t have to worry about corporate taxes, which can hit 21% for bigger companies, but you do have to pay self-employment taxes—about 15.3%—to cover Social Security and Medicare.

LLCs also use pass-through taxation by default, so your business income flows to your personal tax return just like a sole proprietorship. If your LLC earns $80,000, you’d report it the same way, paying your individual tax rate plus self-employment taxes. But here’s where LLCs offer more flexibility: you can choose to be taxed as a corporation instead. This might make sense if your business is making a lot of money—say, $200,000 a year—and you want to leave some profits in the company to avoid higher personal tax brackets. Corporate taxation lets you pay the 21% corporate rate on those profits, then take a salary that’s taxed at your personal rate. Most Series A startups in 2025 stick with pass-through taxation because it’s simpler, but consulting a tax expert can help you decide what’s best for your situation.

Business Name: Making It Official

Naming your business is another area where these structures differ. If you’re a sole proprietor, you don’t have to register your business name with the state unless you’re using a name other than your own. For example, if you’re Jane Smith and want to call your bakery “Jane’s Sweet Treats,” you don’t need to do anything. But if you want to call it “Sweet Treats Bakery,” you’ll need to file a DBA (doing business as) name, which costs around $20-$50 in most states in 2025. Some states might also require a business license, which can run $50-$100 depending on your industry and location.

An LLC, however, requires you to register your business name with the state when you file your formation documents. You’ll need to pick a name that’s not already in use—most states have an online database you can check—and include “LLC” or “limited liability company” in the official name. For example, if you want to call your tech startup “CodeWorks,” you’d register it as “CodeWorks LLC.” This process also involves a filing fee, which we’ll cover next. The name registration ensures your business is legally recognized as a separate entity, which can help with branding and credibility.

Filing Fees and Ongoing Costs

Costs are another factor to consider when choosing your structure. A sole proprietorship has no upfront filing fees—you can start doing business right away. Depending on your state and industry, you might need a business license or permit, which typically costs $50-$100 in 2025. For example, if you’re starting a freelance writing business in California, you might pay $70 for a local business license, but there’s no state filing required.

LLCs come with more upfront and ongoing costs. To form an LLC, you’ll need to file articles of organization with your state, which usually costs $50-$150 in 2025. California, for instance, charges $70, while Delaware—a popular state for startups due to its business-friendly laws—charges $90. You’ll also need to pay annual fees, which range from $20 to $300 depending on the state. California has an $800 annual franchise tax for LLCs, plus a $20 filing fee, which can add up quickly. Some states, like Texas, have no annual fee, making them more affordable for small businesses. You’ll also need a registered agent to handle legal documents—services like Northwest Registered Agent cost around $125 a year, though you can act as your own agent in some states to save money.

Choosing the Right Structure for Your Startup

Both sole proprietorships and LLCs have their strengths, and the best choice depends on your business’s needs and risks. A sole proprietorship is the easiest way to start—it’s free to set up, there’s no paperwork, and you have full control. If you’re launching a low-risk business, like a freelance photography gig or a small online store selling handmade jewelry, this structure might be all you need. You’ll keep things simple, avoid filing fees, and report your income on your personal tax return without any extra hassle.

But if your business has higher risks—like a food truck that could face lawsuits over food safety, or a tech startup taking on debt to develop a new app—an LLC offers a layer of protection that’s hard to beat. The legal separation between you and your business means your personal assets are safe if things go south. Plus, an LLC gives you more credibility with customers, vendors, and investors, and the flexibility to be taxed as a corporation can save you money as your business grows. In 2025, LLCs are the go-to choice for most Series A startups, especially in tech-heavy sectors where investors prefer the structure’s clarity and protection.

There’s no one-size-fits-all answer—your decision should match your goals and risk tolerance. If you’re a solo founder just starting out and want to keep things simple, a sole proprietorship might be the way to go. But if you’re planning to scale, take on investors, or operate in a risky industry, an LLC is likely the better bet. If you’re still unsure, talking to a business coach, attorney, or trusted advisor can help you weigh your options and make a choice that sets your startup up for success. The right structure isn’t just a legal formality—it’s a foundation that can support your business as it grows and evolves.