LLC vs Sole Proprietorship vs Corporation

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Summary: LLCs are the best business structure for the majority of entrepreneurs. Sole Proprietorships offer no protection whatsoever. Corporations are complex and subject to double taxation. See the details below.

LLC vs. Corporation vs. Sole Proprietorship: Form an LLC (3/11)

Have you ever asked yourself which business structure is the best for you?

A Sole Proprietorship?

A Limited Liability Company (LLC)?

Or how about a Corporation?

What is an LLC?

An LLC is a Limited Liability Company. It is a legal entity (business structure) and it can be used to run a business, or it can be used to hold assets (such as real estate, boats or aircraft for example).

The owners of an LLC are called “members”. An LLC can be owned by one person (called a “Single-Member LLC”) or an LLC can be owned by two or more people (called a “Multi-Member LLC”).

An LLC is a business structure designed specifically to protect your personal assets from the liabilities of the business.

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What is a Corporation?

A Corporation is also a legal entity (business structure) and it is most often used to run a large company with shareholders and investors (they are not ideal for owning real estate).

The owners of a Corporation are called “shareholders”. After you form a Corporation, you must elect a Board of Directors (to oversee the company) and you must elect Corporate Officers (to execute and run the day-to-day business).

Corporations are what we typically think of when we hear Microsoft, Apple, IBM, McDonalds, etc.

What is a Sole Proprietorship?

A Sole Proprietorship is when a person does not form a business entity and they operate their business as themselves.

In the eyes of the law, you ARE your business.

This is a very risky structure because if your business is sued, then you are personally responsible for all debts and liabilities.

This means that your personal assets (home, cars, bank accounts) are at risk of being used to cover those debts and liabilities.

A Sole Proprietorship offers you no protection whatsoever.

We’ll save you some time right off the bat… a Sole Proprietorship = a bad idea.

“Okay, sounds good. But which is the best for me?”

Good question.

As we said, a Sole Proprietorship offers you no protection whatsoever.

A Sole Proprietorship is typically setup when someone is unaware of the options they have when it comes to setting up their business structure.

In essence – this structure is not protecting anything. Not you. And not your assets.

Maybe a Corporation would be the better option for you?

In short, Corporations are not a “bad” business entity… but they are not for everyone.

They are best suited for companies that want to go public via an IPO, an initial public offering on the stock market (again, think Google or Microsoft).

Corporations are best suited for companies that need to raise large amounts of money.

Corporations are also required to hold annual meetings, record all meeting notes, and issue shares to the stockholders.

Since most entrepreneurs just want to get their business off the ground, a Corporation is usually not the best bet as it will be too complex and costly to maintain.

LLC Advantages

An LLC is a “hybrid” between a Corporation and a Sole Proprietorship.

It harnesses the advantages of both while leaving behind their disadvantages.

Let me explain.

The disadvantage of a Corporation is what’s called “double taxation”. The Corporation must pay taxes at the federal level, and then the owners must pay taxes again on their dividends (on their personal income tax returns).

Corporations are also tedious and expensive to setup.

Again, you’ll need to create a board of directors, corporate officers, and you’ll need to issue stock to the shareholders.

The advantage of a Corporation is liability protection. The owners are protected from the debts and liabilities of the business.

The disadvantage of a Sole Proprietorship is unlimited liability. This means the owner is completely responsible for all debts and liabilities of the business.

The advantage of a Sole Proprietorship is what’s called “pass through taxation”. Sole Proprietorship income “passes through” right to the owner’s individual tax return. This means no corporate tax return and no double taxation!

Sole Proprietorships are also a lot easier to setup and they offer flexible management (you’re not required to hold meetings, elect corporate officers, or issue shares of stock).

LLCs = Best of Both Worlds

LLCs provide liability protection (your personal assets are protected against creditors) and LLCs offer pass-through taxation (avoid the dreaded double taxation).

LLCs were adopted by state law in all 50 states nearly 30 years ago to entice more small business growth.

LLCs are the most popular and the most flexible business structure for business owners, entrepreneurs and real estate investors.

Matt Horwitz
Matt Horwitz
Matt Horwitz has been the leading expert on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC that other companies weren't offering. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.

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61 comments on “LLC vs Sole Proprietorship vs Corporation”

Disclaimer: Nothing on this page shall be interpreted as legal or tax advice. Rules and regulations vary by location. They also change over time and are specific to your situation. Furthermore, this comment section is provided so people can share their thoughts and experience. Please consult a licensed professional if you have legal or tax questions.

  1. Thank you for this wonderful resource! I am considering starting an LLC where my father who has a Chinese bank account will buy kits in China and ship them to me in the US, where I will assemble the kits and sell them. In order to deduct the original inventory purchase price, would my father need to be listed as a member of the LLC?

    • You’re welcome Bo! You’ll want to check with an accountant on this. I’m not sure if there’s a way for your LLC to deduct the original purchase price, since your LLC didn’t buy the materials.

  2. I kinda need a quick response ASAP, I recently open an LLC in Louisiana.,I’m the only person on the account. A friend asked me could he use the account to receive funds thru me , to him, then he would pay the 3rd party for supplies . He needs to pay for G 6 underground cables. I know the friend well enough to trust him but don’t know the third party. Additional the 3rd party sending the funds is in Colorado. But the actual person receiving the funds is in Dubai . I’m wondering if this is legal / possibly dangerous ?
    Thanks Carla

    • Hi Carla, we can’t comment on something like this as we’re not sure. However, if you have some “spidey-senses” going off about this, trusting your gut would be what I would do.

  3. Hi Matt, Your course is amazing. I’ve learned so much. But I still have a question. I am looking to form a new LLC where all the members are companies (some LLCs and some Corporations). As such, if the new LLC or one of the members were sued because of work done by the new LLC, will the member companies be protected from liability, the same as if it was personal members?

    • Thanks Tsila! That’s so great to hear. Yes, the liability protection applies to all the LLC owners, whether people or companies. Hope that helps.

  4. Hi, I was told under LLC you pay more taxes? My situation is different. The only reason I want this is because they want to garnish my wages. I work from home and the employer is willing to change it under the ‘business name” to avoid the garnishment. So I really only need this for that even though I will still be employed by the same employer. Which one do I sign up for?

    • Hi Sandra, we can’t comment on how an LLC can or can’t be used while wages are being garnished. However, you can read how are LLCs taxed. There aren’t additional income taxes, since the Single-Member LLC is taxed like a Sole Proprietorship. However, there may be state fees, such as an LLC Annual Report and filings due with the Department of Revenue or similar agency.

  5. It seems that in NY (at least) an LLC offers barely more asset protection than a SP. If so, why go through the hassle and expense? It would seem the money is better spent buying personal – general liability insurance.

    • Hi Marky, a New York LLC provides better liability protection than operating as a Sole Proprietorship. Yes, personal umbrella insurance is important. And yes, business liability insurance is important. However, an LLC with business insurance is a stronger setup than a Sole Proprietorship with business insurance.

  6. Hi, Matt,
    Thanks for your effort to provide such a comprehensive resource for newbies like me. I am a professor who recently had a contract to work part-time for a consulting firm to provide scientific advice. Beginning in 2021, the company can no longer list me as a contractor on their payroll due to whatever accounting rule changes. They requested to pay through either a sole prop (with tax id) or a LLC, or through 3rd party. I have been debating between sole prop and LLC, and based on my reading of your articles, there seems to be a breakpoint on cost/benefit to choose one vs another (considering the work I do is of very low risk). Amount of work per year is in the range of $30~40k. It doesn’t seem to worth the cost to set up LLC with S-corp status for tax benefit. Looks to me then the only benefit setting up LLC in my case is the liability protection, but with lot more paper work. What would be your suggestion? Thank you!

    • Hi Steven, you’re very welcome! Yes, you are correct. Forming an LLC and having that LLC elect S-Corp taxation may not be worth the extra cost and paperwork and payroll requirements. You are also correct in that the LLC provides liability protection. Since LLC filing fees are relatively low, we really never recommend a Sole Proprietorship. We have step-by-step courses on forming an LLC if that is the route you decide to take. Hope that helps.

  7. I just got my LLC formed and EIN , but I would really like to get a virtual business address. How difficult is it to update both the LLC and EIN and addresses? Is there a long turn around? I had to form my business very quickly so I did everything in 3 days! Do you pay taxes based on the virtual address location instead of home office location?

    • Hi Val, in what state did you form the LLC? And what address do you need to change? The Registered Agent address? Any other address… do you specifically know which fields on the state LLC form? Here is instructions on how to change the address with the IRS: Change LLC address with IRS. Taxes are typically owed based on where and how the income is made. We recommend speaking with an accountant for details. Hope that helps.

  8. Thank you for this resource and all the advice provided on this site. It’s straightforward and useful. I’m converting my Sole Prorpietorship to an LLC and was wondering what “assuming that the business is properly ran through the LLC” meant in the above comments. Wondering if I need to be wary of any pitfalls. Again Thanks!

  9. Thanks Mr.Matt
    Its really very helpful to me.

  10. Hello, I just changed my soap, wax tarts/melts, and soy candles business into an LLC. My business is very small at this time, making only around $1,000-$2,000 profit /year. I was told I needed liability insurance to protect my personal assets in case someone burns down there house using one of my candles. I thought having an LLC would protect my personal assets in those types of situations. Would having the LLC protect my personal assets if I were sued for someone burning down there house using my candles (which has a warning label on it). Or would I still need liability insurance?

    • Hi Catherine, yes, an LLC will protect your personal assets from events that occur within the business (assuming that the business is properly ran through the LLC). However, some businesses also get general liability insurance for extra protection. The insurance isn’t a requirement, however, it can be helpful. Meaning, if your business is sued and found at fault and there isn’t insurance, the business will become a judgment debtor and have damages to pay. So yes, personally, you are protected, but your LLC has debt it now needs to pay. If your LLC has insurance, the insurance may help pay some or all of those damages. Hope that helps.

  11. I’m a producing artist operating from home and also an art agent with a list of 200 local and international artists I promote for or directly buy from and sell their work for profit . I work on percentage gain from the sales .
    What type of business form is best to register my home based gallery under ?
    LLC, sole proprietorship or corporate and why ?

    • Hi Sam, we’re unable to specifically tell readers which business entity is the best for their situation, however this page does explain many of the pros and cons. However, typically speaking, most small business owners do choose the LLC as it offers personal liability protection. A Sole Proprietorship does not provide personal liability protection (although a Sole Proprietorship could obtain insurance… and on that note, an LLC or Corporation could also obtain insurance for extra protection). And most small business owners don’t choose a Corporation because of the double taxation. Hope that helps.

  12. Matt, I have a E-Com Business what would be the best entity for my business, I could possibly move overseas(expat)?

    • Hi Henry, will you personally reside outside of the US for a long period of time? Between which entity structures are you considering?

  13. If a business is owned by what they call “managing partners,” has both a multi member executive and management board, receives money from an investment firm, has stake holders, but not shareholders (no public offerings), would they be considered a sole proprietorship, an LLC, a corporation, or a company?
    How can I find out which of the 4 types of business it is?
    Can a managing partner who is part owner be on a board of directors and also work in their business?

    • Hi Brad, it matters less what titles are used and more what the entity actually is. Meaning, if a legal entity was created, then some type of documents were filed (Articles of Organization, Articles of Incorporation, Certificate of Limited Partnership, etc.) with the state. It’s that form which dictates the type of entity it is, not the titles that people use. You can do a Secretary of State business search in the state where you think the entity was created. The entity you’ve described sounds like it could be a Corporation, Limited Partnership (LP), Limited Liability Partnership (LLP), or a Limited Liability Limited Partnership (LLLP). Also, shareholder doesn’t mean the company sells shares publicly. A public or non-public company can have shareholders. It just means they have ownership. And there is no such entity as a “company”. “Company” is an unofficial and ambiguous term. A “company” is usually some type of legal entity, although, some Sole Proprietors may refer to themselves as having a company. Hope that helps.

  14. I am in the process of purchasing a business I have worked at for 20 yrs. It is a Corporation with 3 shareholders. How easy is it to change from a corporation to a LLC?

    • Hi Sue, this is typically known as an entity conversion. The rules vary by state, it’s not something we have information on, they are usually complex, and it’s best practice to work with an experienced attorney in this regards. There are tax considerations as well, so also running it by a tax attorney would be a good idea. Wish we could provide more info. Hope that helps though and thanks for your understanding.

  15. I have several questions that would like to ask in a one to one call. Is that possible?
    How I can reach a person for advisory?.


    • Hi Rosa, we don’t offer phone support at this time. Feel free to ask one or two questions here if you’d like. Thank you for your understanding.

  16. Hi Matt,

    I have a dilemma. I’m not sure about an llc or S corporation
    here is my situation: I will star working as a speech therapy but need to receive W2 I will be the only member/officer
    what would be my best option?


    • Hi Gloria, the conversation actually isn’t “LLC vs S-Corp” (since an S-Corp isn’t a state entity)… it’s “LLC vs LLC taxed as S-Corp”. You can find details here: LLC taxed as S-Corp. You’ll also want to check the Professional LLC (PLLC) requirements in your state if you are licensed. Hope that helps.

  17. LLC University is a MEANINGFUL resource to small businesses!!! I’m contacting you to find out if I need to obtain an EIN. I’m working on obtaining an LLC for a sign language interpreting service, but plan to operate it as a single-member entity. I’ve seen information that suggest that it is not necessary to obtain an EIN for an LLC if you will not have employees. However, I’m wondering if there may be instances where having an EIN would be beneficial. Please share your thoughts.

    • THANK YOU!! Although you don’t technically need an EIN for a Single-Member LLC (taxed as a Sole Proprietorship), however, not all banks know this, and they’ll still ask for an EIN when opening an LLC bank account. Additionally, for some tax forms and other registrations, people prefer to give out their EIN instead of their SSN (for privacy reasons). Are there particular reasons why you don’t want to get an EIN for your LLC?

      • Matt,

        I have no problem with getting an EIN. The EIN that I’m speaking of is for the business mentioned above. My husband and I have a family business that my husband operates which has an EIN. Currently, our business and personal tax paperwork are being done together. I’m reconsidering setting up the second LLC as a married couple single-member LLC. I will be operating the second business. I didn’t know if getting an EIN for a second LLC would confuse things with our tax paperwork.

        • I see. Thanks for the details. If you formed a new husband and wife Single-Member LLC (aka Qualified Joint Venture LLC), with or without an EIN, an accountant would likely file its taxes under a Schedule C under one of your SSNs. Please double-check on the details with an accountant, but the EIN shouldn’t impact that. Hope that helps.

  18. I created a LLC effective 6/15 in PA. While completing my application for an EIN, I listed 2 under 8b and partnership under 9b with the thought that my wife would be involved. That is not the case and the LLC is a one member entity. Do I need to revise any of my LLC formation documentation. I have made 3 capital investments into another entity, but there has been no return on capital or income earned. Thanks in advance!

    • Hi Randy, since LLC Member information is not present in the PA Certificate of Organization, you don’t have to revise your state LLC documents. You’ll want to prepare a new Operating Agreement though with just you as the Member. You’ll also need to notify the IRS of the change from an LLC being taxed as a Partnership (Multi-Member LLC) to an LLC being taxed as a Sole Proprietorship (Single-Member LLC). Alternatively, you can cancel the EIN and then apply for a new EIN, listing 1 Member. Hope that helps.

  19. i am a non us citizen living in Africa who wants to open an LLC in the states… But when it comes to opening of the business bank account, i noticed that all banks require you visit their branch before you can apply.. is there a way i can fax all my document to the bank without making a visit for my account opening..

  20. Good Morning Matt,
    Your videos and discuss on each topic is very helpful and easy to follow.
    I wanted change partnership to LLC in California under a Qualified Joint Venture, the husband and wife. Do i needs to get new EIN number or I keep the same. If I can keep the same, what form to fill-up.

  21. This is a great service. i paid a lawyer 800$ to get this info first time. It may be complicated. Reg S corp above you may want to mention that when a new entrepreneurship is formed, it is best to form tax tax losses on personal income until turns profitable before filing 8832 and have it classified whatever.

    • Thanks Ravi. We do have a lesson on LLC taxed as S-Corp, so good note there. As an FYI, if an LLC is electing S-Corp tax classification, Form 8832 is not needed. Only Form 2553.

  22. My business is currently a sole proprietor. How could I change it to an LLc would I have to get a new EIN number or can it be kept the same?

  23. Great site! I needed this info now as I plan my business future.

  24. Hi Matt, your page is GOLD. Thank you!
    I understand that although a LLC does not require Directors or Officers it may be appropriate in certain cases including to show that your LLC is actually run as a company. Do you have sample documents for electing officers/ appointing directors and general company minutes? All the best.

    • Hi Arno, thanks for the kind words! You can spell out those roles in the LLC Operating Agreement if you’d like. If not, you can create an LLC Resolution. We don’t have any available at this time, but it’s on our list. Thanks :)

  25. Let us say that I have a civil judgment against me for well less than 6 figures now, I have paid back about 30k but I still have at least 70 left. Will forming an LLC or Corp help protect money if I can make it?? I would assume because if it became valuable I would own it but I would also have to have a co-owner. Sorry its a complex situation.

    • Hi Josehp, I wish we could be more helpful, but I’m really not sure… but it doesn’t seem like it. This would be a question for an attorney familiar with your case. Best wishes.

  26. Thanks for this great site! Clear and succinct, straight-talking info.

    Question: Re the liability of a sole proprietor, what if it’s highly unlikely that the business would ever be sued?

    In my case, the business is just an e-newsletter, and I think the following points are significant:

    1) The newsletter contains only technical information — It provides no advice, suggestions, or guidance on how to do anything.

    2) It contains a disclaimer absolving the publisher (me) of any responsibility for errors, omissions, etc.

    3) Subscribers are corporate professionals who are aware of the above two points, and aren’t motivated to “blame the messenger” anyway.

    4) The only interfacing I have with others is transmitting the newsletter to readers, and billing their employer. All other activities involve no one, i.e. no clients or suppliers visit me which could otherwise lead to liability scenarios.

    5) I presume an LLC would not protect personal assets in cases involving criminal business activity.

    That said, I don’t feel at risk as a sole proprietor. Since I have the pass-through benefit of an LLC or S-corp without the filing and paperwork issues, is there a downside to my arrangement?

    Thanks for any comments!

    • Good points you’ve made, but still, there are dozens of other reasons one could be sued that you did not mention. We cannot get into legal advice, but this conversation (regarding your exposure to liability) should be carried out with an attorney. Apologies I couldn’t get more into this with you.

  27. I noticed that you don’t speak of a /s corporation. This entty is very important to let your readers know about.

    • Hey Sabrina, great comment. We figured throwing S-Corp into the conversation too early could be a bit confusing for a lot of people starting out. Plus, most people form an LLC and then have it taxed as an S-Corp later on… so we decided to write about S-Corp separately. You can see the article here if it’s helpful: LLC taxed as S-Corp. Thanks again for your comment!

  28. Do you have an operating agreement for manager-managed that you can email me?

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