Sole Proprietorship vs. LLC

Sole proprietorships are popular for self-employed professionals, freelancers, and contract workers, while LLC offers personal liability protection than sole proprietorship.

Author: Brad Nakase, Attorney

Email  |  Call (888) 600-8654

An LLC gives its members limited liability, protecting them from being held personally liable for its financial obligations. A sole proprietorship provides no legal separation between itself and its owner; the sole proprietor owner will receive all its profits and be accountable for all its losses and debts. Overall, a limited liability company offers more protection in terms of personal liability protection than sole proprietorships.

 In this article, our LLC attorney in San Diego will discuss sole Proprietorship vs. LLC as follows:

Is It Better to Be a Sole Proprietor or LLC?

An LLC has distinct advantages in the areas of legal protection and liability. Although sole proprietorship is easier to start and operate, LLC is a separate entity and offers protection in terms of liabilities.

When an entrepreneur begins a new business, it is critical that he or she choose the right business structure for their company. A lot of small business owners prefer two popular entity types due to their flexibility and simplicity: sole proprietorships and limited liability companies (LLCs). The correct option for a small business owner will depend on their particular situation and business needs. However, here are some factors an entrepreneur should consider when deciding on a business structure:

  • Start-up costs
  • Government regulation
  • Liability protection
  • Tax implications

What Is the Difference Between a Sole Proprietorship and an LLC?

A sole proprietorship is an unincorporated business owned and run by one person. An LLC exists separately from its owners—known as members. However, members are not personally responsible for business debts and liabilities. Instead, the LLC is responsible. Sole proprietorships are popular for contact workers, freelancers and other self-employed professionals.

Another key difference between LLCs vs. sole proprietorships is tax flexibility.  Only LLC owners can choose how they want their business to be taxed. With both an LLC and a sole proprietorship, the profit of the business passes through to the owner’s personal tax return.

A sole proprietorship is an unincorporated business that is owned and managed by one individual. This choice is the easiest structure for new entrepreneurs. The business owner is entitled to all the company’s profits. However, unlike an LLC, there is no liability protection for the owner.

A limited liability company is a legal entity that is registered at the state level. An LLC is a separate entity from its owner, who is known as a member. Members of an LLC are not personally liable for business debts or obligations. Rather, the company itself is responsible.

What Is the Importance of Personal Liability Protection?

An LLC is liable for the debts and liabilities incurred by the business—not the owners or managers. Creditors can generally only go after assets that belong to the LLC business, not those personally owned by the LLC’s owners and members. This means that LLC owners, also known as members, are not responsible for paying LLC debts. Personality liability protection means the owners’ assets, such as cars, homes and bank accounts, are safe.

If a business owner runs an LLC, this means that his or her personal assets are protected in the event of debt or a lawsuit. Creditors may generally not go after a business owner’s house, car, or personal bank account.

With a sole proprietorship, there exists no separation between the owner and the company. This means that while an owner is entitled to all of the company’s profits, he or she is also entitled to all of its debts and obligations. It is possible that an owner may be responsible for any of their employees’ liabilities.

What Are the Differences in Taxes for Sole Proprietorships and LLCs?

By default, the IRS taxes it the same as a sole proprietorship. According to the IRS, a single-member limited liability company is a “disregarded entity,” meaning there is no separation between the business and its owner. An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self-employment in the same manner as a sole proprietorship.

How to Form An LLC?

To form an LLC in California, go to, log in, select Register a Business under the Business Entities Tile, Articles of Organization – CA LLC and follow the prompts to complete and submit.

When an entrepreneur decides to form an LLC, he or she will need to file articles of organization, which is sometimes referred to as a certificate of organization, with the state in which the company will operate. Each state will have different requirements.

Usually, an LLC operating agreement is created to record the members’ and managers’ duties and rights.

An entrepreneur should also anticipate filing certain documents with the Secretary of State, as well as paying a filing fee of between $50 to $500. LLCs are required to file annual or frequent reports and pay a filing fee in most states.

A sole proprietorship, meanwhile, can be formed without formal action. However, if a business owner wishes to operate under a different name than their own, he or she will need to file for a DBA.

It may also be necessary to get any required permits or licenses, which will vary according to region, state, and industry.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment Law

Most recent blogs:

Material Breach of Contract

A material breach of contract occurs when a party fail to perform a contract's terms making the primary purpose of the contract not met, the breach is considered material.

What Type of Business Is a Partnership?

A partnership is the simplest business structure where two or more people are owners of a business. The types of business partnerships include general partnership, limited partnership, and limited liability partnership.

What Is Company Culture?

A company culture is how things get done in the workplace. Company culture can more be described as core values or operating principles used to set the tone for the company's overall operations and success.

What is a sole proprietorship?

A sole proprietor is someone who owns an unincorporated business by himself or herself. A sole proprietorship is a business that can be owned and controlled by an individual.

Sole Proprietorship vs. LLC

Sole proprietorships are popular for self-employed professionals, freelancers, and contract workers, while LLC offers personal liability protection than sole proprietorship.

Is it legal to sell homemade food in California?

Yes, you can sell food from home so long as you have California-required health and food handling permits and business licenses. You must get a permit to sell food from home from the county health department in California. 

How to Incorporate a Small Business in California?

To incorporate a small business in California, file an Articles of Incorporation with the California Secretary of State's office. After you file the Article of Incorporation, create corporate bylaws, and elect your initial director(s).

6 Steps for Planning a Business Grand Opening

1. Create Goals for the Event, 2. Begin Planning Early, 3. Stick to the Budget, 4. Have the Right Insurance, 5. Advertise Before the Event, 6. Offer Food and Entertainment

10 Facts About Business Before Starting A Business

1) More than 50% of new businesses survive their first year in business. 2) Less than 50% of family-owned businesses are passed to their children. 3) 40% of business experience challenges in the supply chain…

S Corp vs C Corp – Differences and Benefits

The main difference between an S Corp and a C Corp is that for a C Corp, the corporate profit is taxed to the company, and the dividends to the shareholders are also taxed. In contrast, for an S Corp, the profit is taxed to the shareholder but not to the corporation. Generally, small businesses are S Corps, and major companies are C Corps, e.g., Apple, Microsoft, Caterpillar, John Deer, etc.

How to Form a Corporation in California?

To form a corporation in California follow these steps: 1) Write a one page Article of Incorporation, 2) File the Article of Incorporation with the California Secretary of State, 3) Elect corporate board of directors, 4) File Statement of Information with Secretary of State.

What are the benefits of a corporate lawyer?

The are many benefits of hiring a corporate lawyer for your business which includes: avoiding litigation, enforceable contracts, develop employee policies, proper licensing, etc.

What is Commercial Litigation?

Commercial litigation refers to litigation (lawsuit) that involves commercial or business disputes in court between two or more parties.

How to Get Rid of a 50 50 Business Partner.

How to Get Rid of a 50/50 Business Partner. One method to get rid of a 50/50 partner is to file a business partnership dissolution in the state your company was formed to end the partnership.

Personal Assistant Scam

A personal assistant scam typically involves a perpetrator putting out an ad to hire a personal assistant. Then, when the perpetrator purportedly hires the personal assistant, the assistant is asked to buy something with their own money with the promise to be repaid. The perpetuator then disappears after receiving the goods.

Fiduciary Responsibility Definition

A fiduciary responsibility refers to an organization that must put another person’s best interest first. A fiduciary duty is the highest standard of care in law. For example, a lawyer owes a fiduciary responsibility to the clients, a doctor owes a fiduciary duty to a patient, and a trustee owes a fiduciary duty to a beneficiary.

What is profit formula and how to calculate profit formula?

A business profit is revenue minus expenses. The profit formula in accounting calculates the net gains or losses incurred by the business for a period by subtracting the total expenses from the total income: Total Income – Total Expenses - Profit

What is invoice reconciliation?

Invoice reconciliation is the process of matching bank statements to incoming and outgoing invoices. The purpose of invoice reconciliation is to confirm that the data entry is correctly matched with every invoice.

What Makes a Verbal Contract Valid

A verbal contract is valid when contractual elements are satisfied, such as evidence of an offer, acceptance of the offer, and consideration which is an exchange of value between the parties.

Marketing Transport Company

The easiest way of growing your list of clients is to schedule a meeting with businesses that do a lot of shipping and introduce your transportation company. Then, engage an internet presence to market your transportation business.

What Can You Do with a Toxic Business Partner?

A bad partnership could lead to profit loss and toxic company culture. The first way of dealing with a toxic business partner is to schedule a meeting to discuss your concerns calmly.

Disruptive Business Model

Disruptive business models are disruptive innovations that bring new business ideas or technology to existing markets. A disruptive business does not fit the profile of a standard business model. Amazon is considered as one of the world's most disruptive companies.

How to Get a Business Loan with Bad Credit

For small business owners with bad credit, the easiest place to get a business loan is with the SBA. Although not easy, entrepreneurs with bad credit can get a small business loan.

How to Get a Small Business Grant

You can get a small business grant from the Small Business Administration. Also, check your local government for small business stimulus grants.

Pros and Cons of Etsy

Etsy Pro: Your products are given a large audience, and you easily sell your merchandise. Etsy Cons: You can only sell handmade or vintage merchandise, and there are many competitors.

What is a Breach of Contract in California?

A breach of contract in California arose when a party to a contract failed to achieve a legal duty the contract created. When a party to a contract fails to fulfill the terms of a binding contract, they are liable for damages for breaching the contract.

Business Equipment Leasing Pros and Cons

One advantage of equipment leasing is that you don’t need to come up with all the cash to buy the equipment. One disadvantage of equipment leasing is higher overall costs than outright purchasing the equipment.


The main difference between an LLC and a DBA is that an LLC is a business entity, and a DBA is a registered fictitious business name. Sole proprietors, general partnerships, and LLC can register for a DBA.

Contact our attorney.

Please tell us your story:

3 + 1 = ?