Sole Proprietorship vs LLC: Key Differences Explained (2026)

A sole proprietorship is appropriate for very small, low-risk businesses such as freelance writing, tutoring, lawn care, or selling handmade goods at craft fairs. It makes sense when you are testing a business idea, have minimal revenue, face low liability risk, and want to avoid the cost and paperwork of forming a formal entity. Many businesses start as sole proprietorships and convert to LLCs as they grow.

Form an LLC when you want to protect your personal assets from business liabilities, especially if you are in a field with litigation risk such as consulting, construction, food service, or e-commerce. An LLC is also advisable when you have significant business assets, work with clients who require it, plan to bring on partners, or want the option to elect more favorable tax treatment as your income grows.

LLC formation costs vary significantly by state. Wyoming charges only $100 to form an LLC with no state income tax. California charges $70 to file but imposes an $800 minimum annual franchise tax regardless of income (Cal. Rev. & Tax. Code 17941), making it one of the most expensive states for LLCs. New Mexico charges $50 with no annual report requirement. New York requires LLCs to publish formation notices in newspapers, costing $1,000-$2,000 depending on the county. Some states like Alabama, Illinois, and Connecticut impose annual or biennial report fees ranging from $50 to $500.