Written & reviewed by NotALawyer Review AI · Updated June 26, 2026
If you start working for yourself and do nothing else, you're automatically a sole proprietor — it's free and requires no paperwork, but there's no legal line between you and the business, so your personal assets can be exposed if the business is sued or owes money. An LLC is a separate legal entity you create by filing with your state; it puts a liability shield between your personal savings and the business and tends to look more credible to clients and banks. The trade-off is a filing fee and some ongoing paperwork. By default, both are 'pass-through' for taxes, meaning the profits land on your personal return.
You don't file anything to become a sole proprietor — you already are one the moment you start doing business under your own name. The downside is there's no separation: if the business is sued or can't pay a debt, your personal assets (home, savings, car) can be on the line.
An LLC is a separate entity, so in most situations a business debt or lawsuit reaches only what the business owns — not your personal property. That shield isn't absolute (fraud, personal guarantees, and mixing personal and business money can pierce it), but it's the main reason people form one.
Forming an LLC means a one-time state filing fee, and many states also charge an annual or biennial report fee to keep it active. The exact filing fee depends on your state — see the panel on this page. A sole proprietorship has none of that.
Both are pass-through by default: business profit flows to your personal tax return, and you pay self-employment tax on it. Forming an LLC doesn't automatically change your tax bill, though an LLC can later elect to be taxed differently.
An LLC can make a small business look more established to clients, lenders, and vendors, and it reserves your business name in the state. A sole proprietor using a name other than their own usually has to file a 'DBA' (doing-business-as) instead.
More on this topic: the Small Business hub
This is the one-time fee your state charges to file the articles of organization that legally create an LLC, with the recurring annual or biennial report/franchise fee noted alongside. Each value is cited to the state statute or agency; a state with no sourced figure shows "Not yet sourced."
General information, not legal advice. Rules change and exceptions apply — confirm the current rule with the cited source for your state.
NotALawyer.com provides general legal information, not legal advice.