The key differences, what each one costs, and how to decide without spending $500 on a lawyer for a straightforward question.
Most new small business owners start as sole proprietors without realising it — if you're doing business without forming a legal entity, that's what you are by default. Here's how that compares to forming an LLC, and how to decide which makes sense.
It's the simplest business structure — you and the business are legally the same entity. There's nothing to file, no fees, and minimal ongoing requirements. The downside: you're personally liable for all business debts and legal claims. If your business is sued, your personal assets — savings, car, home — are at risk.
A Limited Liability Company creates a legal separation between you and your business. If the business is sued or can't pay its debts, your personal assets are generally protected. It also looks more professional, can have tax advantages, and is relatively inexpensive to form.
State filing fees range from $50 (Kentucky) to $500 (Massachusetts), with most states in the $100-200 range. You'll also need to file an annual report in most states, usually $25-100 per year. Services like LegalZoom or Northwest Registered Agent can handle the paperwork for an additional fee — typically $49-100 on top of the state fee.
If you're just testing a business idea, have very low liability risk, and earn under $50K per year, the additional complexity of an LLC may not be worth it yet. Many freelance writers, tutors, and pet sitters operate as sole proprietors indefinitely without issue.
If you work with clients on their property (trades, cleaning, landscaping), give professional advice (consultants, accountants, designers), or have revenue over $50K, the liability protection is worth the cost. Also consider it if you want to open a dedicated business bank account or need to sign contracts in the business's name.
An LLC is a "pass-through" entity by default — profits flow through to your personal tax return. You can also elect to be taxed as an S-Corp once your income reaches a certain level, which can reduce self-employment tax. This is worth discussing with an accountant once you're consistently earning over $40-50K.