LLC vs. Sole Proprietor: Which Protects You (and Your Wallet) First?
- Kayla Hubbard
- Oct 4
- 4 min read
What’s the real difference (taxes, liability, admin)
Sole Proprietor
Taxes: Business income is your personal income (Schedule C). No separate business return.
Liability: No shield. If something goes wrong, your personal assets can be on the line.
Admin: Lowest friction. If you use a trade name, you’ll likely file a DBA (“Doing Business As”).
LLC (Limited Liability Company)
Taxes (default): Pass-through like a sole prop. You can later elect S-Corp status if it makes sense.
Liability: Corporate veil. When you keep finances and formalities clean, your personal assets are generally protected.
Admin: Formation filing with your state, an operating agreement, a registered agent (often required), and simple annual upkeep.
Bottom line: If your risk is more than “friends-and-family hobby,” an LLC gives you grown-up protection with beginner-friendly admin.
Costs + timelines for each (state fees, EIN, bank)
State formation fees: Vary widely by state (some low, some a few hundred).
EIN (Employer Identification Number): Free—apply online with the IRS once your entity and responsible party info are set.
Banking: Open a separate business account to preserve the liability shield and make tax season painless. Most banks want your EIN and formation docs (or DBA for sole prop).
Timeline: Many LLCs are formed same day to a couple of weeks depending on the state and whether you pay for expedited processing.
Tip: Don’t buy extras you don’t need at checkout screens. You usually do need: formation, registered agent (if required), operating agreement, and EIN. You can skip vanity upsells.
Hiring, partners, and growth: when the answer changes
Partners or co-owners? A sole prop can’t have them. You’ll want an LLC (multi-member) with an operating agreement that spells out ownership, profit splits, and decision rights.
Employees or contractors? You can hire as either structure, but the risk profile (client exposure, deliverables, contracts, deposits) often nudges you toward an LLC.
Plan to raise capital or bring on advisors? An LLC’s formal structure, bank-ready separation, and clean paperwork make leveling up easier.
Rule of thumb: If you’re signing contracts, handling client money, shipping products, or giving advice, the LLC is the safer default.
The 15-minute decision framework (3 questions)
Set a timer. If you answer “yes” to any of these, pick LLC and move:
Meaningful risk? Could a delivery, agreement, or client outcome put you on the hook?
Not solo? Co-founders now or soon, or advisors with equity?
Serious intent? You want clean books, business credit, and a structure you won’t outgrow in 90 days.
If you answered “no” to all three and just want to validate an idea with two clients, a sole prop with a DBA can be a light, temporary start—just keep it clean and upgrade to an LLC as soon as you see traction.
Exactly what to file this week (checklist)
If choosing LLC:
Name check + state filing: Search your state registry, then file Articles of Organization (online in most states).
Registered agent: Appoint one (you or a service) to receive official notices.
Operating agreement: Even for single-member LLCs—defines ownership, decision-making, and protects the veil.
EIN (IRS): Free. Get it after the state confirms your LLC (some states allow same day).
Business bank account: Bring formation docs + EIN. Use it for all business income/expenses.
Licenses/permits: Local or industry-specific (e.g., sales tax, professional licenses).
Insurance: General liability or professional liability if you advise or deliver services.
Bookkeeping: Turn on a simple system (monthly P&L, receipts, tax set-asides).
Client paperwork: Update proposals, invoices, and contracts to the LLC’s legal name and EIN.
If staying Sole Proprietor (for now):
DBA/Fictitious Name (if using a trade name).
EIN: Optional but helpful for hiring, banks, and privacy.
Business bank account: Still mandatory for clean books and audit protection.
Local licenses/permits & insurance as needed.
Bookkeeping + contracts just like an LLC—professional from day one.
Common mistakes to avoid:
Mixing personal and business money (pierces the liability shield).
Skipping an operating agreement (“I’m solo, I don’t need it”—you still do).
Signing contracts under your personal name after forming the LLC.
Not registering for sales tax or required local permits.
What this means for you in plain language (LLC vs. sole proprietor).
If you’re building a real business (not a test), the LLC is usually worth the modest extra paperwork for the protection and credibility alone.
If you’re testing an idea with two clients and low risk, start sole prop with a clean setup, then switch to an LLC once you see proof of concept.
Either way, open a dedicated bank account, track money weekly, and use clear contracts. That’s how you look—and operate—like the premium version of your brand from day one.'
Book your next step (done with you)
Feeling 80% sure and want it locked in?→ Book a Clarity Session. In 45 minutes, we’ll confirm your entity choice, map your filings, and outline your first banking + bookkeeping moves. Leave with a personalized checklist and zero guesswork, and make a choice about filing an LLC vs sole proprietor.
Disclaimer: This article is for general informational and educational purposes only and is not legal, tax, or accounting advice. Reading it does not create a client relationship with Kayla Sierra Consulting, LLC. Laws, fees, and requirements vary by state and change over time—consult a licensed attorney and/or CPA in your jurisdiction before making decisions. Examples are illustrative; outcomes are not guaranteed. Kayla Sierra Consulting, LLC disclaims liability for actions taken or not taken based on this content. Current as of October 2025.
Comments