LLC vs. Sole Proprietor: Which Business Structure is Right for You?

Introduction

Choosing the right business structure can have long-lasting effects on your taxes, liability, and growth potential. If you're a freelancer, consultant, or side hustler thinking about going legit — you’re probably choosing between being a sole proprietor or forming an LLC. Here’s how they compare in 2025.

What Is a Sole Proprietorship?

This is the most basic business structure — it’s automatic when you start working for yourself and don’t register an entity. You report income and expenses on your personal tax return (Schedule C), and there’s no legal separation between you and the business.

What Is an LLC?

A Limited Liability Company (LLC) is a formal legal entity registered with your state. It offers personal liability protection and more flexibility in how you’re taxed. An LLC can be a single-member (disregarded entity) or multi-member (treated like a partnership or S-Corp).

Key Differences in Liability Protection

• Sole Proprietor: No liability protection. Your personal assets are at risk if your business is sued.
• LLC: Separates your personal and business assets. You’re typically not personally liable for business debts or lawsuits.

Tax Differences Between LLC and Sole Proprietor

By default, both are taxed similarly (pass-through taxation). But an LLC gives you the option to elect S-Corp taxation — which can save self-employment taxes if your business earns enough.

• Sole Proprietor: Report profits/losses on Schedule C
• LLC: Can be taxed as sole prop, partnership, or S-Corp

S-Corp status requires payroll and IRS compliance but can reduce your overall tax liability.

Cost to Form and Maintain Each

• Sole Proprietor: Free to start; may need local business licenses
• LLC: $50–$500 state filing fee; annual report fees or franchise tax may apply

Costs vary by state, so research your local requirements.

Which Offers More Flexibility?

• Sole Proprietor: Simple structure, easy to manage
• LLC: More flexible tax options, can add members or change structure as you grow

LLCs are better suited to growth, partnerships, or seeking funding.

How to Choose Based on Your Industry

Ask yourself:

• Does your work involve liability or client contracts?
• Are you planning to hire or partner with others?
• Do you want to deduct benefits like health insurance or retirement?

If yes to any of the above, an LLC may be the smarter move.

Changing Structures: Sole Prop to LLC

You can always start as a sole proprietor and switch later. You’ll need to:

• Register your LLC with your state
• Get a new EIN and bank account
• Update your contracts and payment platforms

There may be tax planning advantages to making the switch early in the year.

How Wood Tax Advisory Can Help With Setup

We help you decide on the right structure for your business and make setup seamless. Our services include:

• LLC registration guidance
• Filing EIN and state tax forms
• Bookkeeping setup and tax strategy

Conclusion & Call to Action

Your business structure affects everything from how you file taxes to how protected you are. Let’s make sure you choose what’s right for your goals. Schedule a free consult with Wood Tax Advisory today and start smart in 2025.