A sole proprietorship is free but leaves your personal assets exposed; an LLC costs a state fee but legally separates you from the business. By default they’re taxed identically, so the decision is really about liability and credibility versus cost.
Side-by-side
| Sole proprietorship | LLC | |
|---|---|---|
| Cost to start | $0 (automatic) | State filing fee (~$35–$500) |
| Ongoing cost | $0 | Annual fee in most states ($0–$800) |
| Personal liability protection | ❌ None | ✅ Yes (if kept separate) |
| Default taxation | Pass-through + SE tax | Same (pass-through + SE tax) |
| S-corp election possible | No | Yes |
| Credibility / banking | Lower | Higher (separate EIN, business account) |
| Setup effort | None | File articles + registered agent |
When a sole proprietorship is fine
- You’re testing an idea with little liability risk (e.g., freelance writing) and few assets to protect.
- You want zero cost and zero paperwork to start.
Remember you can still operate under a business name with a cheap “DBA” and get an EIN — without forming an LLC.
When to form an LLC
- You have personal assets (home, savings) you want shielded.
- Your work carries real liability (anything physical, client contracts, products, property).
- Clients, landlords or partners expect a registered business.
- You’re approaching the profit level where an S-corp election could cut taxes (only LLCs/corporations can elect it).
The cost of the upgrade
The LLC’s protection isn’t free, but it’s modest: a one-time filing fee plus an annual fee. Check your state’s exact numbers on the cost-by-state page, estimate the all-in figure with the formation-cost calculator, and see the full breakdown in how much an LLC costs in 2026.
Bottom line
If the business has any meaningful liability or assets to protect, the LLC’s small annual cost usually buys peace of mind that’s well worth it. If you’re just testing a low-risk idea, a sole proprietorship lets you start free and upgrade later. General information, not legal or tax advice.