LLC vs. Sole Proprietorship: What Actually Changes
If you start doing business by yourself without filing anything, you already have a business structure: a sole proprietorship. Forming an LLC is a decision to replace that default with a registered legal entity. The differences are real, but they're narrower — and more specific — than most "start an LLC today" marketing suggests.
What an LLC changes
Legal separation. An LLC is a separate legal person under state law. It can own property, sign contracts, and be sued in its own name. If the business is run properly — separate bank account, no commingling of funds, contracts signed in the company's name — a creditor of the business generally must pursue the LLC's assets rather than your house or personal savings. That separation is the core product you're buying. It is not absolute: courts can disregard an LLC that's treated as a personal piggy bank, and no entity protects you from liability for your own professional negligence or personal guarantees you sign.
A state filing record and recurring obligations. Formation costs a filing fee — anywhere from $35 in Montana to $500 in Massachusetts — and most states add a recurring report or tax. California LLCs owe an $800 annual franchise tax; Texas LLCs file a franchise tax report but most owe $0. You can see the exact numbers for your state with the LLC cost calculator or the state-by-state cost table.
A name and formality layer. The LLC's registered name is protected against identical registrations in that state, you'll maintain a registered agent, and you'll keep the entity in good standing with annual or biennial filings.
What an LLC does not change
Your federal taxes, by default. A single-member LLC is a "disregarded entity" to the IRS: profits land on your personal Schedule C exactly as they did when you were a sole proprietor, including self-employment tax of roughly 15.3% on net earnings. An LLC doesn't lower your taxes by existing. (Electing S corporation treatment can change the picture at higher profit levels — see LLC vs. S corporation election — but that's a tax election available to an LLC, not an automatic feature of one.)
Licenses, permits, and insurance. Whatever your city, county, or industry required from you as a sole proprietor, it still requires from your LLC. Liability insurance remains just as relevant; an LLC shields your personal assets from business creditors, but insurance is what actually pays a claim.
The honest cost comparison
A sole proprietorship costs $0 to create and roughly $0 a year to maintain (a DBA filing, if you want a trade name, is typically $10–$100 depending on the county). An LLC costs its state's formation fee up front, plus recurring state fees that range from $0 per year in states like Arizona, Missouri, and Ohio to $800+ per year in California — plus a registered-agent service at roughly $100–$300 per year if you don't serve as your own.
How people commonly decide
The usual pattern: businesses with meaningful liability exposure, contracts, employees, or premises tend to form an entity early, because the separation is cheap relative to the risk. Very small, low-risk side activities often stay sole proprietorships until revenue or risk grows. Where your situation falls depends on facts we can't see — the type of work, your assets, your state's fees, your risk tolerance — so treat this as a map of the tradeoffs, not a recommendation. A conversation with a business attorney or CPA is inexpensive compared to getting the structure wrong.