If you’re just starting a business, one of the first decisions you’ll face is choosing the right business structure. Two of the most common options for small business owners and freelancers are the Limited Liability Company (LLC) and the Sole Proprietorship.
But which is better for you in 2025?
In this guide, we’ll compare LLCs vs. sole proprietorships based on taxes, liability, cost, and long-term growth to help you decide what works best for your goals.
✅ What Is a Sole Proprietorship?
A sole proprietorship is the simplest type of business. It’s automatically formed when you start doing business as an individual—no need to file paperwork or register with the state in most cases.
Key traits:
- Owned by one person
- No legal separation between you and the business
- All profits and losses go directly to your personal tax return
Pros:
- Easy and free to start
- No formal paperwork in most states
- Full control over decisions
- Simple tax filing
Cons:
- No liability protection
- Harder to get business credit or investors
- Business name isn’t protected in your state
✅ What Is an LLC (Limited Liability Company)?
An LLC is a legal business entity registered with your state. It separates your personal assets from your business.
Key traits:
- Can be owned by one person (Single-Member LLC) or multiple people
- Offers legal protection
- Requires registration with the state
- Can be taxed in different ways (default, S Corp, C Corp)
Pros:
- Personal liability protection
- Flexible tax options
- Better credibility and brand protection
- Easier to get business credit and funding
Cons:
- Requires filing and annual fees
- More paperwork and compliance
- Costs more than a sole proprietorship
⚖️ LLC vs. Sole Proprietorship: Key Differences
| Feature | Sole Proprietorship | LLC |
|---|---|---|
| Legal Separation | ❌ No | ✅ Yes |
| Liability Protection | ❌ None | ✅ Yes |
| Formation Cost | ✅ Free or very low | ❌ $50–$500 (varies by state) |
| Taxes | Personal income tax | Pass-through by default, or elect S Corp |
| Business Name Protection | ❌ Not protected | ✅ Protected in your state |
| Credit & Loans | 🚫 Harder to access | ✅ Easier with EIN & credibility |
| Suitable For | Freelancers, hobbyists | Growth-minded businesses |
💵 Which One Is Better for Taxes?
If you stay a sole proprietor, all your profits are taxed as personal income. This means you’ll likely pay:
- Income tax
- Self-employment tax (15.3%)
An LLC by default is also taxed as a pass-through entity (like a sole prop). However, you can elect to be taxed as an S Corporation (S Corp), which can save money on self-employment taxes if your profits are high enough.
📌 Want help estimating your tax savings as an LLC taxed as an S Corp? Let me know, and I’ll build you a custom calculator.
🛡️ Which One Offers More Protection?
This is where the LLC wins—by far.
If you run a sole proprietorship and your business is sued or goes into debt, your personal assets (car, home, savings) are at risk.
An LLC legally separates your business and personal assets. This means if your business runs into legal trouble, your personal property is typically safe.
🧠 Which One Is Better for You?
Choose a Sole Proprietorship if:
- You’re testing an idea or freelancing
- You’re OK with no liability protection
- You want to start immediately without paperwork
Choose an LLC if:
- You want personal liability protection
- You plan to grow, scale, or hire people
- You want to look more professional
- You need business credit or bank accounts
📍 Real-Life Example
Let’s say you’re a freelance designer:
- As a sole proprietor, you can invoice clients and report your earnings on your personal taxes.
- But if a client sues you, you’re personally on the hook.
Now imagine forming an LLC instead:
- Your business is legally separate.
- You can open a business bank account, sign contracts as a business, and even get better deals from vendors.
- You reduce personal legal and financial risk.
🌐 Useful Resources
💡 Final Verdict: Which Is Better?
For most people, starting out as a sole proprietor is the quickest route to begin making money. But if you care about asset protection, credibility, and growth, forming an LLC is well worth the small upfront cost.
In 2025, many states make it easier than ever to form an LLC online—often in 24 hours.
📩 Need Help Choosing Between an LLC or Sole Proprietorship?
Just tell me a bit about your business, goals, and whether you’re based in the U.S. or abroad. I’ll help you choose the right path and build a custom step-by-step guide just for you.