Sole Proprietorship vs LLC: Liability & Setup Cost
Why a sole proprietorship is cheapest to start but leaves your personal assets exposed, and what an LLC adds for the filing fee.
A sole proprietorship is not a separate entity — you and the business are the same person in the eyes of the law. An LLC is a legal entity separate from you. That single difference drives almost everything else.
| Dimension | Sole Proprietorship | LLC |
|---|---|---|
| Liability protection | None — a business lawsuit or debt can reach your home, savings, and personal accounts. | Full separation — business creditors generally cannot touch your personal assets. |
| Taxation | Pass-through on Schedule C; 15.3% self-employment tax on net profit. | Pass-through by default; same self-employment tax, with an optional S-Corp election later. |
| Setup cost | About $0–$50 (maybe a DBA and local license). | $50–$500 state filing plus an annual franchise tax in many states. |
| Compliance burden | Minimal — just your personal tax return. | Low to moderate — annual report and state franchise tax. |
| Equity & investor limits | One owner; no investors possible. | Can admit members, but not built for venture capital. |
| Best for | Low-risk solo tester or hobby-scale side business. | Any business with real revenue, liability risk, or a brand worth protecting. |
The trade-off in plain terms
You save maybe a few hundred dollars a year by staying a sole proprietor, but you accept unlimited personal liability. The moment you have inventory, clients, a lease, or anything that could go wrong, the LLC filing fee is cheap insurance. Many founders run a sole prop at first, then form an LLC once the project shows it will last.
Note: This comparison is educational reference, not legal advice (非法律建议). Entity and tax rules differ by state — confirm with a licensed attorney in your state before choosing a structure.