LLC vs Sole Proprietor: What’s Best for Your Business?
Introduction
Thinking about making your side hustle official? You might be wondering: should I stay a sole proprietor or form an LLC? Here’s a simple breakdown to help you decide what’s best for your business.
What Is a Sole Proprietor?
A sole proprietor is the default setup. If you start a business by yourself and don’t form a legal entity, you’re automatically a sole proprietor.
Benefits of being a sole proprietor:
- Easy setup — no special paperwork
- Low cost — no extra state fees
- Simple taxes — report income on your personal tax return
But being a sole proprietor means there’s no legal separation between you and your business. If something goes wrong, your personal assets could be at risk.
What Is an LLC?
An LLC (Limited Liability Company) is a legal structure that separates your personal property from your business. It adds a layer of protection if your business gets sued or owes money.
Benefits of an LLC:
- Limited liability protection — keeps your home, car, and savings safer
- More professional image — clients may trust an LLC more
- Flexible taxes — you can stick with pass-through taxes or elect different tax options
Forming an LLC requires paperwork with your state and may include fees and annual filings.
Taxes: Sole Proprietor vs LLC
For taxes, a sole proprietor and a single-member LLC are treated the same by default. You report your business income and expenses on Schedule C of your personal tax return and pay self-employment taxes.
But an LLC gives you options. Some LLC owners choose to be taxed as an S Corporation to save on self-employment tax — but this adds complexity and filing requirements.
When to Stay Sole Proprietor
It might make sense to stay a sole proprietor if:
- You’re just testing a business idea
- Your business has low risk of lawsuits or debts
- You want the easiest setup and tax filing
When to Choose an LLC
Consider forming an LLC if:
- You want to protect personal assets
- Your business could be sued or face liability
- You plan to grow, hire, or work with bigger clients
- You want a business name separate from your own name
Other Things to Consider
Besides taxes and liability, think about:
- State fees and renewal costs for LLCs
- Licensing and permit needs
- Separate bank accounts for LLCs
Each business is different — what works for one person might not be best for another.
How Wood Tax Advisory Can Help
Not sure if you should form an LLC or stay a sole proprietor? We’ll walk you through the pros and cons for your specific situation and help you file the right paperwork.
Schedule your free consult today to make the best choice for your business!
