One of the first items you’ll need to tick off your to-do list when starting a new business is choosing a structure. Among the options available, most small business owners favor either a sole proprietorship or a single-member limited liability company (SMLLC).
What you’ll learn
What you’ll learn
Updated: June 17, 2025
Key takeaways
- Sole proprietorships are considered the easiest and least expensive business entity to set up
- Single-member LLCs offer liability protection while providing easier access to funding
- Carefully weigh the pros and cons of each business structure, as your choice can influence various business aspects
This guide will explore the key differences between a sole proprietorship vs. an LLC to help you choose the right business structure for your new enterprise.
What is a sole proprietorship and how does it work
Simply put, a sole proprietorship is an unincorporated business with a single owner, and it’s undoubtedly the easiest business entity to set up. Why? You don’t need to file any paperwork to establish a sole proprietorship. If you’re the sole owner of your business, such as a freelance web designer or personal trainer, then bingo! You’re already a sole proprietor.
Because sole proprietorships are incredibly easy to start, they’re preferred by many independent contractors and freelancers.
What is a single-member LLC and how does it differ
A single-member limited liability company or SMLLC is a unique type of LLC with a single owner. Both sole proprietorships and SMLLCs are owned by a single individual with complete control over business affairs. Yet while both sole proprietorships and SMLLCs share this trait, there’s a key difference between them: SMLLCs treat the owner and the business as separate legal entities.
Now that we’ve covered the basics of each structure, let’s address a tax question that’s likely top of mind for most business owners. For expert insight, we spoke with Peggy James, a certified public accountant and frequent OnPay contributor who has been helping small businesses navigate these decisions for over a decade.
Which pays less taxes, sole proprietorship or LLC?
“When it comes to taxes, sole proprietorships and single member LLCs are treated the same. The IRS considers an LLC what it calls a disregarded entity, meaning that it looks behind the LLC to see what it’s made up of. If a business is a single member LLC, the IRS will treat it as a sole proprietor for tax purposes, which will be subject to self-employment taxes. If it’s a multi-member LLC, the IRS will most likely treat it as a partnership, which will be required to file a separate tax return each year (Form 1065) to report business income and expenses that pass through to each of the partners/LLC members.”
— Peggy James, CPA
Now that we better understand the differences between these two business structures — and learned that they’re treated the same for tax purposes — it’s time to explore the potential advantages and disadvantages of each one.
Pros and cons of sole proprietorships
According to data from the Small Business Administration (SBA), about nine out of 10 nonemployer firms were sole proprietorships in 2021. So why join the millions of entrepreneurs running sole proprietorships and start your own? Here are some characteristics to consider:
- Ease of formation: A sole proprietorship is the quickest way to start a business. There’s zero paperwork and no fees.
- Full control: You make the decisions. You don’t have to answer to another partner, managers, shareholders, or a board of directors. Want a raise? You pay yourself as the business owner, no questions asked!
- Pass-through taxation: Filing tax forms is straightforward. You simply need to complete Schedule C when filing your personal tax returns. This involves paying self-employment taxes, though.
While sole proprietorships provide all these benefits, here are some things that may having entrepreneurs thinking twice:
- Unlimited liability: Your personal assets are tied to the business. You could lose your home, car, savings, or other possessions if you’re sued or can’t pay your debts.
- Difficulty obtaining funding: Many investors and financial institutions consider sole proprietorships high-risk investments. Additionally, unlike corporations, sole proprietorships can’t offer investors equity, making it tough to raise capital.
- Limited credibility: Financial institutions, lenders, and even some clients perceive sole proprietorships as less credible than corporations and LLCs due to their less formal business structure.
Pros and cons of single-member LLCs
Looking to form a business that offers some of the benefits of a sole proprietorship and a corporation? Consider an SMLLC. It offers the simplicity of a sole proprietorship and other perks, including:
- Limited liability protection: An SMLLC exists as a separate business entity. Creditors can’t seize your personal items to settle business debts.
- Tax flexibility: LLCs offer greater flexibility when it comes to LLC vs. sole proprietorship taxes. With an SMLLC, you can elect to be taxed as a C or S Corp, potentially reducing your tax burden.
- Improved credibility: Financial institutions, investors, and clients often perceive SMLLCs as more reliable than sole proprietorships. With an SMLLC, you might find raising capital and attracting clients easier.
SMLLCs aren’t perfect, though. Some of their downsides include:
- Higher formation costs: You’ll need to file paperwork and pay filing fees to set up an SMLLC.
- Ongoing compliance: You must fulfill various compliance requirements to maintain your company’s legal status.
Keep in mind
“Certain types of professions may be required to form a Professional Limited Liability Company (PLLC) instead of a standard LLC. For example, I’m a CPA, and when I started my business in North Carolina, I was required to set up a PLLC rather than an LLC.
There are specific requirements depending on your line of work; in my case, I had to go through my state’s CPA licensing board first to get their approval before my PLLC application was sent to the Secretary of State’s office for a final OK. Health professions are often required to go the PLLC route, too. If you have a professional license, make sure you understand what type of LLC is recommended and/or required in your state.”
— Peggy James, CPA
Key differences between sole proprietorships and LLCs
A single-member LLC vs. a sole proprietorship have things in common but you’ll want to understand how they differ.
Legal liability
There’s no legal distinction between you and the business in a sole proprietorship. All business expenses, income, debts, and obligations are yours. In contrast, an SMLLC treats the owner and business as separate entities. If you’re sued or can’t settle business debts, your personal items aren’t at risk.
Tax treatment
When it comes to sole proprietorship vs. LLC taxes, both entities use pass-through taxation. This means they allow you to report your business income and losses when filing your personal tax returns. However, a single-member LLC gives you the flexibility to elect to be taxed as a C or S Corp if that’s more financially advantageous.
Startup complexity
You don’t need to file any paperwork to set up a sole proprietorship. Once you start conducting business, you’re good to go. To form an SMLLC, you must file paperwork with your state’s Secretary of State.
Management
Sole proprietorships and SMLLCs both have one completely autonomous owner. There’s no need to consult anyone before making business decisions. However, a multi-member LLC or MMLLC differs from SMLLCs, as it has two or more owners, and all of them can make decisions impacting the business.
Public perception
Whether justified or not, some lenders, investors, and clients may perceive sole proprietorships as less established. These stakeholders tend to look more favorably upon LLCs, including single-member LLCs.
Taxation explained: Pass-through and disregarded entity status
Single-member LLCs regard the owner and business as separate entities. However, for taxation purposes, the IRS treats SMLLCs like sole proprietorships. They are both considered disregarded entities, meaning the business doesn’t file tax returns. Instead, the owner reports business income and expenses using Schedule C, filed with personal tax returns.
However, while the IRS treats SMLLCs as disregarded entities by default, if you have an LLC you can opt to be taxed as a C or S Corp instead.
How to choose the right business structure for your goals
If you’re still unsure where you stand when it comes to a sole proprietorship vs. LLC, consider these factors when selecting a business structure:
- Legal liability concerns: An LLC can protect your personal items from being taken in the event of debt default, lawsuits, or bankruptcy.
- Tax goals: An LLC can offer more tax flexibility and potentially lower your tax burden. Consult your financial advisor for guidance on potential LLC tax benefits.
- Operational needs: Sole proprietorships have minimal operating costs, while LLCs are costlier to run due to their additional paperwork and compliance requirements. If you have a modest budget, a sole proprietorship might be your best bet.
- Long-term strategy: If your long-term plans involve capital-intensive projects such as expanding into markets overseas, an LLC will make obtaining funding to support your company’s growth easier.
Industry-specific and regulatory factors to keep in mind
Some industries have stringent requirements. If you work in a heavily regulated or high-risk industry, or one where you’re at risk of lawsuits, an LLC offers better liability protection. For example, healthcare businesses may need the personal liability protection of an SMLLC due to the high risk of clients pursuing legal action against them.
We’ve explored the key differences between these structures, but you’re probably wondering which one actually makes sense to move forward with. Though there’s no one right answer, we asked Peggy for some parting thoughts.
Verdict: Which is better, LLC or sole proprietorship?
“It depends on your situation and in particular your goals. If you have a side hustle that isn’t your primary source of income, it may not make sense to form an LLC given the costs and logistics of compliance with state requirements. Likewise, if your profession is low risk, or you don’t have much in the way of personal assets, the liability protection of an LLC might not be appealing to you.
Personally, I like LLCs for the liability protection they offer and generally recommend them to my clients who are self-employed. The cons — mainly the fees and the annual filing requirements — are in my opinion a fairly small price to pay for the benefits. But if you’re mainly interested in tax savings, keep in mind that forming an LLC in and of itself won’t affect your tax liability, so I wouldn’t recommend an LLC if your only goal is to reduce taxes.”
— Peggy James, CPA
S Corp vs LLC: Choose the business structure that best fits your goals
The business structure you choose can influence everything from your ability to secure capital to the safety of your assets. That’s why it makes good business sense to select a structure you feel good about from the get-go. When deciding between an S Corp and LLC, consider both your immediate needs and long-term goals. If you prioritize simplicity and pass-through taxation flexibility, an LLC might serve you better. However, if you’re looking to minimize self-employment taxes and reinvest profits back into the business, an S Corp structure could offer significant advantages.
It can make sense to consult with a financial advisor or tax professional and remember that your choice isn’t permanent — many businesses start as LLCs and later elect S Corp tax treatment as they grow. The key is choosing a structure that supports your current operations while leaving room for future adjustments.
Regardless of the business structure you choose, OnPay can make running small business payroll a breeze and set you up for success no matter what stage your business is in.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.