Choosing the right business structure can be tricky, especially when comparing an LLC vs sole proprietorship. If you're starting a business on your own, you might be considering what is a single owner LLC and how it stacks up against a sole proprietorship. Being a sole proprietorship is the simplest way to start, and is often chosen by business owners who want to dive right in. However, a single owner LLC provides more protection for your personal assets. Key takeaways:

Knowing the difference between sole proprietorship and LLC is important for solo business owners.
Single member LLCs have liability protection but have to pay more formation costs than sole proprietors.
Single member LLCs can be taxed as sole proprietors, S Corps or C Corps.

Table of contents

What is a sole proprietorship?...Read more

What is a single owner LLC?...Read more

LLC vs sole proprietorship...Read more

What is a sole proprietorship?

A sole proprietorship is the simplest way to start a business on your own. It’s an unincorporated business, meaning there’s no legal difference between you and your business. This setup is easy, with minimal paperwork and no need to register with the state. You’re in charge of everything and keep all the profits. There is a downside when comparing a sole proprietorship vs LLC. Since you and your business are the same legally, you’re personally responsible for any debts or legal issues the business might face. This means that if your business runs into trouble, your personal assets could be at risk.

What is a single owner LLC?

An LLC (Limited Liability Company) protects your personal assets if your business faces legal trouble or debt. This means your personal belongings, like your home or savings, are usually safe. A single-member LLC is a type of LLC with just one owner. This is often referred to as a single-owner LLC. It allows you to have complete control of the business while still enjoying personal liability protection. A multi-owner LLC is a business structure where two or more people share ownership and management responsibilities. Multi-member LLCs can also choose to be taxed as an S Corp or C Corp if that suits your business better.

LLC vs sole proprietorship

Choosing between an LLC and a sole proprietorship involves weighing some important differences. If you're a solo business owner, you might be wondering whether you should file as a single-member LLC or a sole proprietorship. Here are four key differences between the two.

Formation

Starting a sole proprietorship is quick and easy. With sole ownership, there’s little paperwork, and you won’t pay many fees. You can simply start your business, possibly needing only a basic license or permit. This simplicity makes it a popular choice for new entrepreneurs. When comparing sole ownership vs LLC, setting up an LLC, whether it’s a single-member LLC or has multiple owners, involves more steps. You’ll need to file Articles of Organization with your state and pay formation fees. LLCs also have ongoing costs like annual report fees and franchise taxes. Before forming your LLC, you must choose a registered agent in your state. This person or company will receive legal documents on your behalf, which is important if there’s a lawsuit. Your LLC’s name must include “LLC” or “Limited Liability Company” and be unique in your state. Some states also require you to publish a notice about your LLC in a local newspaper or file with the county. Most states require periodic reports, like annual ones, and franchise taxes. Rules and fees vary by state, so check what’s needed where you are.

Liability protection

With sole proprietorship, you don’t get personal liability protection. This means if your business faces legal problems or debt, your personal assets could be at risk. In contrast, a single-member LLC offers strong protection. It keeps your personal assets separate from your business assets. So, if your single-member LLC runs into legal or financial trouble, your personal belongings are generally safe. This protection is a major advantage when comparing sole ownership vs LLC.

Ownership

In a sole proprietorship, you’re the only owner and make all the decisions. It’s the simplest form of business ownership, giving you full control and flexibility. The difference between a sole proprietorship and an LLC is significant. An LLC can be a single-member LLC, meaning it has just one owner, or it can have multiple members. This flexibility allows you to manage the business and distribute profits as you choose. If your sole proprietorship grows and you want to add another owner, you'll need to switch to a general partnership. This change requires you to get an EIN (Employer Identification Number), as you can no longer use your Social Security number. You’ll also need to file Form 1065 to report earnings and losses, and issue separate Schedule K-1s to cover each partner’s share.

Taxation

If you run a sole proprietorship, you report your business income and expenses using Schedule C, which is attached to your personal income tax return (Form 1040). Your business profits are taxed at your personal income tax rate. The tax deadline is April 15 each year. You’ll also need to file Schedule SE to pay self-employment taxes, which cover Social Security and Medicare. These taxes are in addition to your income tax and are based on your net earnings. As a sole proprietor, you’re required to make estimated tax payments quarterly—on April 15, June 15, September 15 and January 15—to cover your income and self-employment taxes. If you don’t make these payments, you might face penalties. You can deduct business expenses as tax deductions by keeping detailed records of these costs and ensuring they are ordinary and necessary to your business.

Infographic entitled 2024 Estimated Tax Deadlines showing due dates for business owners comparing single member llc vs sole proprietorship.

With a single-member LLC, you initially report your income and expenses on Schedule C, similar to a sole proprietorship. However, you have the option to elect S Corporation or C Corporation tax status, which changes how you file and pay taxes. If you choose S Corporation status, you’ll file Form 1120S and provide K-1s to report each member’s share of the LLC’s income. For C Corporation status, you’ll file Form 1120. The deadlines for these forms are generally March 15. Like a sole proprietor, a single-member LLC also has to make estimated tax payments quarterly and can use LLC tax deductions to lower taxable income.

Infographic entitled LLC Tax Deductions for anyone comparing single member llc vs sole proprietorship.

FlyFin’s Ultimate Plan is specifically designed to help business owners handle taxes. Expert CPAs provide unlimited tax support on the app, whether it is helping you decide the best business structure for your needs, giving tax planning advice or preparing and filing your returns. AI also finds your business deductions, making sure you save the most possible.

LLC tax loopholes

LLCs can use tax loopholes to lower taxable income and their tax bill. FlyFin offer expert CPA support to handle business taxes on the app.

Sole Proprietorship Vs LLC: Which Is Better?