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When starting a business, one of the biggest decisions you’ll make is choosing between an LLC (Limited Liability Company) and a Sole Proprietorship. Both structures have advantages and drawbacks, and the right choice depends on your business goals, risk tolerance, and financial situation.

This guide breaks down the key differences to help you decide.

A Sole Proprietorship is the simplest and most common business structure. It’s an unincorporated business owned and operated by a single person.

Key Features:

  • Easy to set up – No formal paperwork is required (beyond necessary business licenses).
  • Full control – The owner makes all business decisions.
  • Direct taxation – Profits are reported on the owner’s personal tax return.
  • Unlimited personal liability – The owner is personally responsible for business debts and lawsuits.

An LLC is a separate legal entity that provides liability protection for its owner(s) while maintaining business flexibility. An LLC can also be owned and operated by a single person – Single-Member LLC.

Key Features:

  • More paperwork and fees – Requires state registration and ongoing compliance, such as an annual report.
  • Limited liability protection – The owner’s personal assets are protected from business debts and lawsuits.
  • More credibility – Having “LLC” in your business name can improve professionalism and trust with customers.
  • Tax flexibility – An LLC can be taxed as a sole proprietorship, partnership, or S-Corp for potential tax savings.

Feature

Sole Proprietorship

LLC (Limited Liability Company)

Liability Protection

No protection—owner is personally responsible for debts & lawsuits.

Personal assets are protected—business is a separate legal entity.

Taxes

Income is reported on the owner’s personal tax return (self-employment tax applies).

Can choose how to be taxed—default pass-through taxation or elect S-Corp for potential tax savings.

Credibility

Less formal—may be harder to gain trust with customers and banks.

More professional—adds legitimacy with “LLC” in the business name.

Compliance & Paperwork

Minimal—typically just local business permits and tax filings.

Requires Articles of Organization, an annual report, and a Registered Agent.

Cost to Start

Low—often free or requires only a business license.

Varies by state—Virginia LLCs require a $100 state filing fee.

Fundraising & Business Credit

Harder to obtain loans or investors.

Easier to get business loans and establish business credit.


Already think starting an LLC is right for your business?
Consider using an LLC Formation Service or file online yourself!

Choose a Sole Proprietorship if:

  • You want to start quickly with minimal paperwork.
  • You have low risk and don’t need liability protection.
  • You are okay with self-employment taxes and personal responsibility for business debts.

Choose an LLC if:

  • You want tax flexibility and potential savings through S-Corp election.
  • You want to protect your personal assets from lawsuits and business debts.
  • You want a more professional business structure that builds trust.

Learn More on How to Form a Virginia LLC Yourself Here.
OR Have an LLC Formation Service do it for you for only $100 + state filing fees.
Your LLC will be filed with 100% accuracy and enhanced privacy.

Final Thoughts

Both LLCs and Sole Proprietorships have their advantages. If you’re just starting and want to test your business idea, a Sole Proprietorship may be enough. But if you want liability protection, tax flexibility, and a stronger business presence, forming an LLC is the better long-term option.

If you’re ready to start an LLC, consider using a trusted LLC formation service to ensure everything is filed correctly while maintaining privacy.

1. Can I switch from a Sole Proprietorship to an LLC later?
Yes! Many business owners start as a Sole Proprietorship and later transition to an LLC as their business grows or their liability risks increase. To do this, you’ll need to file Articles of Organization, get a EIN from the IRS, and update any necessary business licenses or permits. If you’re ready, have an LLC Formation Service create your LLC today!

2. Do I need a separate business bank account for my LLC?
Yes, it’s strongly recommended. Keeping your personal and business finances separate helps maintain your LLC’s liability protection, simplifies tax filing, and makes bookkeeping much easier. Some banks require an EIN and a Certificate of Organization to open a business bank account. Learn More Here.

3. Does an LLC save me money on taxes compared to a Sole Proprietorship?
It depends on your business income. By default, LLCs are taxed the same as Sole Proprietorships, meaning you’ll pay self-employment taxes on all profits. However, LLCs can elect to be taxed as an S-Corp, which may reduce self-employment taxes if you earn a substantial income. Consulting with a tax professional can help determine the best option for your situation.