LLC vs Sole Proprietorship: What Changes for Your Taxes

You've been selling your course as a sole proprietor for a year, and it works. Then a client asks for an invoice with a company name on it, a payout gets held up over your "business entity," and someone in a forum tells you you're one lawsuit away from your savings. So you start reading about the LLC vs sole proprietorship question. Every article says the same things about liability and self-employment tax. None of them tells you whether any of it changes what you already charge your customers.

It doesn't. That's the short version, and it's the part almost nobody writes down.

Here's the full comparison, including the part the other comparisons leave out. It's written for creators, freelancers and online sellers running a solo business, not for founders raising outside capital.

LLC vs sole proprietorship at a glance

A sole proprietorship is the default business structure in the US. You become a sole proprietor automatically the moment you start selling something on your own, without filing anything. An LLC is a separate legal business entity that exists because you filed paperwork and paid for the privilege. The trade is liability protection in exchange for cost and admin.

Factor	Sole proprietorship	LLC
How you create it	Automatically, by doing business	File Articles of Organization
Cost to start	$0	Roughly $40 to $500, depending on where you file
Personal liability for business debts	Unlimited	Generally limited to what's in the business
Federal income tax treatment	Pass-through, Schedule C	Pass-through, Schedule C, by default
Self-employment tax	15.3% on net earnings	15.3% on net earnings
Ongoing filings	None	Annual report or franchise obligations
Adding owners	Not possible	Yes, becomes a multi-member LLC
Sales tax, VAT and GST	Set by what you sell and where your buyers are	Set by what you sell and where your buyers are

That last row is the whole article. Hold onto it.

What is a sole proprietorship?

You don't form a sole proprietorship. If you've sold anything without filing entity paperwork, you already run a sole proprietorship, and most people reading this do right now.

The defining fact is that there's no legal wall between you and the business. The business's assets are your assets. Its debts are your debts. If a customer sues the business or a supplier goes unpaid, your savings account and your car are inside the blast radius.

What you get in exchange:

• No formation cost and no annual paperwork to maintain
• Complete control, with nobody to consult
• The simplest possible filing: you report profit and loss on Schedule C attached to your Form 1040
• The ability to wind down by simply stopping

What you give up:

• Unlimited personal exposure to business debts and claims
• Easy access to business credit, since lenders are underwriting you personally
• Continuity, because the business ends when you do

A detail that trips people up: a DBA is not a business structure. Registering a "doing business as" name lets you trade under something other than your own name. It creates no entity, and it moves your personal liability not an inch.

What is an LLC?

A limited liability company is a statutory entity. It exists because a state's law says it does, and you bring it into being by filing Articles of Organization with the Secretary of State and appointing a registered agent to receive legal notices on its behalf.

The core benefit is in the name. Creditors of the business generally have to look to the LLC's assets rather than the owner's personal assets, which is the wall the sole proprietor doesn't have.

That wall is conditional, though, and this is the part that gets undersold. Pay personal bills from the business account, run business income through your personal checking, or otherwise treat the LLC as a costume rather than a company, and a court can pierce the corporate veil and hold you personally liable anyway.

Maintenance is the real cost of running the business this way. Expect a formation fee, an annual report or franchise obligation, and a registered agent to keep paying for. Let those lapse and the state can administratively dissolve the company, which quietly removes the protection you formed it for. Our guide to where to form an LLC breaks down how far those costs swing across the country.

Is an LLC a sole proprietorship?

Not quite, and the answer is more useful than a straight no.

An LLC is a creature of state law. A sole proprietorship is a federal tax classification. They're categories from two different systems, which is why a single-member LLC manages to be both at once: the IRS treats it as a disregarded entity by default, meaning it's ignored for income tax purposes and its owner files exactly what a sole proprietor files.

So "LLC or sole proprietorship" is a slightly false binary. What you're really choosing is whether to add a legal shell around an operation the IRS will keep treating the same way regardless.

The key differences between an LLC and a sole proprietorship

Strip out the overlap and the pros and cons of each business structure come down to four things.

1. Personal liability. This is the real difference, and honestly the only one big enough to decide the question on its own. A sole proprietor's personal assets are reachable by business creditors. An LLC owner's generally aren't, subject to the veil-piercing caveat above.
2. Cost. Nothing versus a filing fee plus recurring annual costs, forever, everywhere the business is registered.
3. Income tax. Effectively identical by default. Both are pass-through, and both report on Schedule C.
4. Credibility and continuity. An entity opens doors that a personal name sometimes doesn't: business bank accounts, enterprise procurement, lenders. It also survives you, and it can take on additional owners.

On that third point, both structures owe self-employment tax on net earnings at the same rates:

Component	Rate	Applies to
Social Security	12.4%	The first $184,500 of combined wages and net earnings in 2026
Medicare	2.9%	All net earnings
Total	15.3%	Identical for a sole proprietor and a single-member LLC

Say it plainly: forming a single-member LLC does not, by itself, lower your federal income tax bill. Several comparisons list flexibility as an LLC advantage without mentioning that the default changes nothing. That flexibility is real, but it is the option to elect corporate or S corporation treatment by filing Form 8832, and it's a separate decision with its own math.

Consider a course creator clearing $80,000 in profit. As a sole proprietor, that's Schedule C, then self-employment tax on the net. Form a single-member LLC, change nothing else, and it's Schedule C again, on the same net. Same forms, same number, plus a filing fee.

What stays exactly the same either way

The similarities get less attention than the differences, and they shouldn't. Whichever structure you pick:

• Income reporting. Schedule C with Form 1040, by default, in both cases.
• Record-keeping. You need complete income and expense records regardless. Business expenses are deductible against gross income either way, which is a reason to keep clean books that has nothing to do with entity choice.
• Employees. Hiring means getting an EIN and handling payroll withholding and remittance, identically for both.
• Licenses and permits. Licensing attaches to the activity you're running, not the wrapper around it.
• Trade names. Both can operate under a DBA.

And the biggest item on that list, the item that costs online sellers the most when they get it wrong, is what you charge your customers.

What an LLC does not change: your sales tax, VAT and GST obligations

Here's the principle, stated once and plainly:

Switching from sole proprietor to LLC changes whose name goes on the registration. It doesn't change whether you need to register.

This is worth spelling out because every major comparison of these two structures skips it entirely. Read the top-ranking guides on this question and you'll find thousands of words about liability, self-employment obligations and franchise fees, and effectively nothing about the money you're collecting from buyers on every order.

Foreign qualification is not the same as sales tax nexus

If you've been reading about LLCs, you've probably hit the term foreign qualification: an LLC that transacts business in a state other than its formation state has to register there too. True, and easy to misread as the whole story.

Two entirely separate obligations get confused here:

• Foreign qualification is a corporate registration duty, owed to the Secretary of State, triggered by the business's presence and operations there.
• Economic nexus is a duty owed to that state's revenue department, triggered by the sales themselves. Cross the threshold and you register, collect and remit, whatever your entity is.

Different trigger, different agency, different threshold, and neither implies the other.

Which produces the result that surprises people most: a sole proprietor with no entity registered anywhere can be legally required to collect sales tax in a state they have never visited.

The Supreme Court's decision in South Dakota v. Wayfair, handed down on 21 June 2018, overturned the old rule that a seller needed physical presence before it could be made to collect. Thresholds are now set by sales volume, and those thresholds apply to sole proprietors and LLCs alike. California requires remote sellers exceeding $500,000 in sales into the state to register with the CDTFA, explicitly regardless of physical presence, and its full sales tax rules go further still. Every state draws its own line, which is why it's worth understanding the various kinds of US sales tax nexus before assuming you're clear of all of them.

Selling internationally doesn't work differently either

Neither structure shields you from foreign VAT or GST.

For digital products and software sold to consumers abroad, the registration thresholds are often far lower than sellers expect, and frequently sit at zero for non-resident businesses. A US seller of digital services to EU consumers has a registration obligation from the very first sale, with no minimum to hide under, handled through the non-Union One Stop Shop scheme. A sole proprietor and an LLC face that identically. We've written up what EU VAT means for remote sellers in full.

When the marketplace handles it for you

Marketplace facilitator rules shift collection and remittance onto the platform for sales made through it. Those rules key off the sales channel, not your entity, so they apply the same way to both structures. Sales through your own checkout stay yours to handle. If you sell across several channels, marketplace tax laws around the world is the map of who owes what where.

The practical takeaway: decide the entity question on liability, cost and credibility, because the answer on what you charge customers is the same on both sides of it.

Which structure is right for your business?

The best structure for your small business depends on what you're exposed to, not on what you'd like your tax bill to be. The rule of thumb is simple. Stay a sole proprietor while your risk is low and the business is still unproven. Form an LLC when personal exposure, client requirements or profit make the annual cost worth paying.

Four situations that come up constantly:

• A creator selling a digital course to a few hundred customers a year. Low liability surface, no inventory, no premises. A sole proprietorship is perfectly reasonable for a business like this. Note that this seller may already owe VAT on European sales, and forming an LLC would do nothing about it.
• An ecommerce seller shipping physical products. Product liability changes things completely for this kind of business. Something you shipped can injure someone, and that's precisely the exposure an LLC is built to contain. Worth the fee.
• A freelancer or consultant landing enterprise clients. Procurement departments often require an entity, insurance certificates and a company name on the contract. The decision gets made for you by your buyers, not by the arithmetic.
• A side business that just got profitable and hired its first contractor. This is where most readers actually are. The honest answer is that it's a judgment call about how much personal exposure you're carrying, and the annual cost is small enough that it's usually worth removing the worry.

Be clear about what this decision isn't. It's not a way to reduce sales tax, VAT or GST, and by default it isn't a way to reduce federal income tax either. If you've decided on an LLC and now need to pick where to form it, that's a separate question with real money attached.

How to switch from a sole proprietorship to an LLC

The mechanics are more straightforward than most people expect:

• Choose your formation state, usually wherever you actually operate
• Check that your chosen name is available and meets the naming rules
• Appoint a registered agent with a physical address there
• File Articles of Organization and pay the fee
• Get an EIN. The IRS says a sole proprietor who forms a single-member LLC can keep using their existing EIN only if they don't elect corporate treatment, have no employees and owe no excise duty. Otherwise you need a new EIN.
• Open a separate business bank account
• Move contracts, payment processing and payouts into the LLC's name
• Write an operating agreement, even as a single member

That bank account isn't housekeeping. It's the commingling safeguard that keeps the liability protection real, and it's the first thing anyone looks at when they want to argue the veil should be pierced.

A final step gets missed constantly, and it's the one this article has been building toward. Your existing sales tax permits and VAT registrations belong to the old entity. When the legal seller changes, those registrations usually need to be updated or re-filed in the new name, and every platform, processor and marketplace collecting on your behalf needs the new details.

Nothing about the underlying obligation changes. The paperwork carrying it does, and a registration sitting in a dissolved sole proprietor's name is exactly the kind of thing that surfaces during an audit.

Whichever structure you land on, what you charge your customers stays the same, and it's the part that gets complicated first. Quaderno watches the registration thresholds in every state and country you sell into, and tells you the moment you're about to cross one. If you're not sure where you stand today, start with our guide to US economic nexus.