Choosing a Business Structure: LLC vs Sole Proprietorship

Starting a new business is a big undertaking—and while you may be focused on launching your product or getting your first clients, one of the most important decisions you’ll make early on is how to structure your business. For most freelancers, side hustlers, and small business owners, the choice comes down to either a sole proprietorship or a Limited Liability Company (LLC).

Both are easy to start, but they offer very different protections, tax implications, and long-term advantages.

Sole Proprietorship

A sole proprietorship is the default business structure when you begin operating without forming a legal entity. It’s the easiest and least expensive way to start a business—but it also comes with some significant limitations.

Pros:

• Easy and free to set up (no formation paperwork necessary)

• Simple tax filing (report income on Schedule C of your personal return)

• No separate business tax return required

Cons:

• No liability protection — you and your business are legally the same

• Personal assets are at risk if the business is sued or takes on debt

• Less credibility with banks, vendors, and clients

LLC

An LLC is a formal business structure registered with your state. It separates your personal and business assets and offers more flexibility, especially as your business grows.

Pros:

• Limited liability protection — your personal assets are shielded from business liabilities

• Pass-through taxation by default (no double taxation)

• Option to elect S-Corp status later for tax savings and planning strategies

• Easier to open business bank accounts, apply for financing, and build credit

• Adds professionalism and legitimacy to your business

Cons:

• Requires state formation paperwork and associated fees

• May require annual reports or franchise taxes, depending on your state

• Slightly more administrative responsibility than a sole proprietorship

Why Liability Protection Matters

If your business is ever sued or takes on debt (that isn’t personally guaranteed), a sole proprietorship exposes everything you own — including your home, car, savings, and more. An LLC creates a legal barrier between your business and personal life, offering protection that can make all the difference.

If you work with clients, sell products, or offer advice or services, forming an LLC can provide the peace of mind that comes with knowing your personal finances are better protected.

When Should You Form an LLC?

Consider forming an LLC if:

• You work with clients, customers, or sell physical products

• You want to keep personal and business finances separate

• You need to limit personal liability

• You’re making income where professionalism and structure matter

• You plan to grow, bring on partners, or raise capital

Final Thoughts

If you’re just getting started with a hobby or side hustle, a sole proprietorship might work for you in the short term. But as your business grows—or takes on more risk—an LLC can offer the legal protections, tax flexibility, and credibility that position you for long-term success.

We're Here to Help

At Assurity Tax and Accounting, we help entrepreneurs weigh the pros and cons of different business structures, including sole proprietorships and LLCs. While we don’t provide legal advice, we can help you understand the financial and tax impacts of your decisions—so you can choose with confidence.

📞 Ready to get started? Schedule a consultation today and let Assurity be part of your advisory team—whether you're just starting out or scaling a growing venture.