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What is the difference between an LLC and a sole proprietorship?

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Both LLCs and sole proprietorships are popular structures for small businesses, but they offer very different levels of protection.

Sole Proprietorship:

The simplest business structure — no formal registration required (beyond local business licenses). You and your business are legally the same entity. All business income is reported on your personal tax return (Schedule C). No liability protection — you are personally liable for all business debts and lawsuits. Your personal assets (home, savings, car) are at risk.

LLC (Limited Liability Company):

Requires formal registration with your state's Secretary of State. Creates a legal entity separate from you personally. Liability protection — your personal assets are generally shielded from business debts and lawsuits. Pass-through taxation by default (similar to sole proprietorship). Requires some ongoing maintenance (annual reports, fees) depending on the state.

When to upgrade from sole proprietorship to LLC: When you start taking on financial risk (contracts, clients, employees). When you have personal assets worth protecting. When you want to appear more professional and credible. When you need a business bank account or want to build business credit.

Cost to form an LLC: State filing fees range from $50 to $500, with annual fees of $0 to $800 depending on the state. The protection is often well worth the modest cost.