General information only — not legal or tax advice.

Sole Proprietor vs LLC: The Facts Side by Side

This page lists facts about two business structures, side by side. It does not say which structure any reader should use. The facts below come only from the U.S. Small Business Administration (SBA) and the Internal Revenue Service (IRS), named in the Sources section.

1. What each one is

TopicSole proprietorshipLimited liability company (LLC)
What it is The IRS describes a sole proprietor as someone who owns an unincorporated business by themselves. The IRS describes an LLC as a business structure allowed by state statute. Each state may use different regulations.
Owner name The owner is called a sole proprietor. Owners of an LLC are called members, according to the IRS.
Number of owners One person, by the IRS definition above. The IRS states that most states permit “single-member” LLCs, those having only one owner. The IRS also states there is no maximum number of members, and that most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities.
Separate business entity The SBA states that sole proprietorships do not produce a separate business entity. The SBA states that business assets and liabilities are not separate from personal assets and liabilities. The IRS Entities page states that a domestic LLC is an entity formed under state law by filing articles of organization as an LLC.

2. How it starts (formation)

TopicSole proprietorshipLimited liability company (LLC)
How it starts The SBA states: “You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business.” The SBA also states that sole proprietors are able to get a trade name. The IRS states that an LLC is a business structure allowed by state statute, and its Entities page states that a domestic LLC is formed under state law by filing articles of organization as an LLC. The IRS states: “Each state may use different regulations, you should check with your state if you are interested in starting a Limited Liability Company.”
Limits noted by the IRS The IRS states that if you are the sole member of a domestic LLC and elect to treat the LLC as a corporation, you are not a sole proprietor. The IRS states that a few types of businesses generally cannot be LLCs, such as banks and insurance companies, and that there are special rules for foreign LLCs.

3. Who is legally responsible for business debts (personal liability)

TopicSole proprietorshipLimited liability company (LLC)
Personal liability, in the SBA’s framing The SBA states that a sole proprietor can be held personally liable for the debts and obligations of the business. The SBA states: “LLCs protect you from personal liability in most instances” and that personal assets — like a vehicle, house, and savings accounts — won’t be at risk in case the LLC faces bankruptcy or lawsuits. The IRS Entities page states that an LLC’s members generally are not personally liable for the entity’s debts.

The words “in most instances” and “generally” above are the SBA’s and the IRS’s own words. This page keeps those words in place and does not state the LLC wording as an absolute.

4. How the owner is taxed

TopicSole proprietorshipLimited liability company (LLC)
How income is reported The IRS lists, for a sole proprietor liable for income tax: Form 1040, U.S. Individual Income Tax Return, and Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business. The SBA states that profits and losses can get passed through to personal income without facing corporate taxes. The IRS describes the default treatments in the two rows below.
Default tax treatment — one owner See the income tax row above: Form 1040 and Schedule C, as listed by the IRS for sole proprietors. For income tax purposes, the IRS states that an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. The IRS also states that, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.
Default tax treatment — two or more owners Not applicable in the IRS definition above, which describes a sole proprietor as owning an unincorporated business by themselves. The IRS states that a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.
Electing corporate taxation The IRS sole proprietorship page does not list a corporate election for a sole proprietorship itself. It states that a sole member of a domestic LLC who elects to treat the LLC as a corporation is not a sole proprietor. The IRS states that an LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes. The IRS Entities page also states that an LLC may elect to be classified as a corporation or an S corporation, using Form 8832 for a corporation and Form 2553 to elect to be an S corporation.
Self-employment tax The IRS lists, for a sole proprietor liable for self-employment tax: Schedule SE (Form 1040), Self-Employment Tax. The IRS also lists Form 1040-ES, Estimated Tax for Individuals, for estimated tax. The SBA states that members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.

5. Ongoing paperwork named on the SBA and IRS pages

TopicSole proprietorshipLimited liability company (LLC)
Federal tax forms listed by the IRS Form 1040 and Schedule C for income tax; Schedule SE for self-employment tax; Form 1040-ES for estimated tax. The IRS sole proprietorship page also lists employer forms — including Forms 941, 943, 944, W-2, W-3, and 940 — in the rows where those taxes apply. The IRS LLC page names Form 8832 in connection with a classification election. The IRS states that, generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed.
State rules The SBA page read for this article does not list a state filing step for a sole proprietorship. It states that a person is automatically considered a sole proprietorship if they do business activities but do not register as any other kind of business. The IRS states that each state may use different regulations for LLCs and to check with the state.
Ownership agreement noted by the SBA No ownership agreement item is listed for a sole proprietorship on the SBA page read for this article. The SBA refers to an agreement in place within the LLC for buying, selling, and transferring ownership, in its discussion of membership changes below.

6. How each ends / life of the structure

TopicSole proprietorshipLimited liability company (LLC)
Life and ending, as described in the sources The SBA states that a sole proprietorship does not produce a separate business entity, and that business assets and liabilities are not separate from personal assets and liabilities. The SBA and IRS pages read for this article do not describe a separate dissolution step for a sole proprietorship. The SBA states that LLCs can have a limited life in many states. The SBA states that when a member joins or leaves an LLC, some states may require the LLC to be dissolved and re-formed with new membership — unless there’s already an agreement in place within the LLC for buying, selling, and transferring ownership.

Sources

Sources are named here by agency and page title. Only facts read on these pages are used above.

Checked November 2026

General information only — not legal or tax advice.