Sole Proprietorship vs LLC: Which Is Better for Your Business? | Gelt

Key Takeaways

• Business Structure Choices: A sole proprietorship is the simplest option, while an LLC provides liability protection and flexibility
• Liability Protection: Sole proprietors are personally liable for debts and lawsuits; LLCs shield your personal assets.
• Taxation & Costs: Sole proprietorships are inexpensive and straightforward to file; LLCs offer more options but come with fees and ongoing paperwork.‍
• Growth Potential: LLCs often provide more credibility and flexibility, while sole proprietorships may limit funding and expansion opportunities.

Structure Overview

What Is a Sole Proprietorship?

A sole proprietorship is the default business structure when one person operates a business without forming a separate legal entity.

• Ownership: One person owns and controls the business.
  
• Taxation: Income is reported directly on the owner’s personal tax return. You pay self-employment taxes plus federal and state income taxes.
  
• Simplicity: No formal paperwork is required to start, aside from local business licenses or permits.
  
  

Why choose it?
It’s ideal for freelancers, consultants, and side hustlers who want to get started quickly with minimal cost.

What Is an LLC?

A limited liability company (LLC) is a legal entity created under state law.

• Liability Protection: Owners (called members) are not personally liable for business debts.
  
• Ownership: Can have one or multiple members.
  
• Taxation: By default, taxed like a sole proprietorship (single-member) or partnership (multi-member). However, LLCs can also elect S Corp or C Corp taxation.
  
  

Why choose it?
LLCs appeal to entrepreneurs who want to separate personal and business assets, gain credibility, and explore more tax planning opportunities.

Key Comparison Factors

Liability Protection

• Sole Proprietorship: Unlimited personal liability. If the business is sued or goes into debt, your personal assets (home, savings, etc.) are at risk.
  
• LLC: Members’ personal assets are generally protected from lawsuits or debts of the business.
  
  

Setup and Administrative Requirements

• Sole Proprietorship: Easy and inexpensive to set up; often no state filing required.
  
• LLC: Requires filing articles of organization, paying fees, and possibly drafting an operating agreement. Annual reports and renewals may also apply.
  
  

Taxation: Who Pays More?

• Sole Proprietorship: Profits are reported on Schedule C of your personal return; subject to self-employment tax.
  
• LLC: Flexible. You can stick with default taxation or elect S Corp status to reduce self-employment tax at certain income levels.
  
  

Costs and Maintenance

• Sole Proprietorship: Minimal costs; usually just local licenses.
  
• LLC: State filing fees (anywhere from $50 - $500), annual fees, and potnetial extra accounting costs.
  
  

Pros and Cons of Each Structure

Sole Proprietorship

Pros:

• Simple to start
  
• Low cost
  
• Complete control
  
  

Cons:

• No liability protection
  
• Harder to raise capital
  
• May seem less credible to clients or investors
  
  

LLC

Pros:

• Liability protection
  
• Tax flexibility (can elect S Corp)
  
• More credibility and professionalism
  
  

Cons:

• Higher startup and ongoing costs
  
• More paperwork and compliance requirements
  
  

Making the Right Choice

Is It Better to Be a Sole Proprietorship or an LLC?

It depends on your situation:

• If you’re testing an idea, freelancing, or have low risk: a sole proprietorship may be fine.
  
• If you’re growing, hiring employees, or want liability protection: an LLC is usually worth it.
  
  

At What Income Level Is an LLC Worth It?

Many entrepreneurs find that once their net income exceeds $50,000–$70,000, electing S Corp taxation for an LLC can save thousands in self-employment taxes.

Who Pays More Taxes: LLC or Sole Proprietor?

At lower incomes, the tax difference may be minimal. But as profits grow, an LLC offers options that a sole proprietorship doesn’t—like splitting income into salary and distributions to reduce taxes.

AI-Powered Tax Tools and Strategies

For Individuals

Freelancers and sole proprietors can use Gelt’s AI-powered guidance to:

• Understand whether staying a sole proprietorship or forming an LLC makes sense
  
• Stay compliant with quarterly estimated payments
  
• Identify structure-specific deductions and strategies to minimize tax liability
  
  

For Businesses

LLCs (especially with multiple members) can leverage Gelt to:

• Assess whether electing S Corp taxation is beneficial
  
• Simplify tax treatment of member distributions
  
• Ensure compliance with both state and federal filing requirements
  
  

General Tax Planning

Whether you’re a sole proprietor or LLC owner, proactive tax planning is essential. Gelt helps you choose the right structure, minimize taxes, and plan for growth—without unnecessary complexity.

Common Questions (FAQs)

• Can I start as a sole proprietorship and switch to an LLC later? Yes—many entrepreneurs do this as they grow.
  
  
• Do I need an EIN for either structure? Sole proprietors can use their SSN, but an EIN is often recommended. LLCs with employees must have one.
  
  
• Will forming an LLC affect how I get paid or file taxes? You’ll typically separate personal and business accounts, but the default taxation can be similar.
  
  
• Is there a difference in how business credit works? Yes—LLCs often make it easier to establish business credit.
  
  

Conclusion

Choosing between a sole proprietorship vs LLC comes down to risk tolerance, income level, and long-term goals. Sole proprietorships are quick, simple, and affordable—but come with personal liability risks. LLCs cost more and require upkeep, but they provide liability protection, tax flexibility, and greater credibility.

No matter which you choose, having a tax strategy matters. Gelt’s AI-powered platform and team of CPAs can help you stay compliant, minimize taxes, and plan for growth.

👉 Talk to a CPA today to make the best decision for your business.