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LLC vs sole proprietorship

Nicolas StrautBy Nicolas StrautPublished 5 min read

Key takeaways

  • Self-employment tax is 15.3% on 92.35% of your net profit under both structures, up to the 2026 Social Security wage base of $184,500. Forming an LLC does not reduce it.
  • The tax break people associate with an LLC comes from the S-corporation election, which needs an LLC or a corporation to exist first. Forming the LLC does not save tax by itself.
  • A sole proprietorship exists the moment you start working for yourself, with no filing and no fee. An LLC takes a state filing, a fee in every state, and an annual obligation in most.
In this article

The difference is liability, not tax. A single-member LLC is a disregarded entity, so you file the same Schedule C and owe the same self-employment tax as a sole proprietor, dollar for dollar.1 An LLC gives you a legal separation between business debts and personal assets, plus the option to elect S-corporation treatment later.

What is the difference between an LLC and a sole proprietorship?

Scroll horizontally to see more columns.
Sole proprietorshipSingle-member LLC
How it formsAutomatically, when you start doing businessState filing, $35 to $500
Cost to start$0Filing fee, plus recurring fee in most states
Personal liabilityYou are personally liable for business debtsLimited by state statute
Federal income taxSchedule C with Form 1040Schedule C with Form 1040, identical
Self-employment tax15.3% on 92.35% of net profit15.3% on 92.35% of net profit, identical
Tax returnNo separate returnNo separate return
EIN requiredOnly with employees or an excise, retirement-plan, or ATF obligationSame triggers, but the EIN sits in the LLC's name
Can elect S-corpNoYes, via Form 2553

The two tax rows are the same for an LLC and a sole proprietorship. Everything an LLC changes is in the top half of the table: how the business is formed and who is liable for its debts. What you send the IRS in April doesn't change.

Does an LLC lower your taxes?

An LLC doesn't lower your taxes on its own. The IRS treats "an LLC with only one member... as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation." Disregarded means the IRS ignores the entity for income tax. The guide to LLC taxes covers the Form 8832 election and the other classifications.

The same IRS page covers self-employment tax, stating that an individual owner of a single-member LLC running a trade or business owes it "in the same manner as a sole proprietorship." So income tax and self-employment tax are calculated the same way under either structure.2

Diagram: a sole proprietorship and a single-member LLC both file Schedule C and Schedule SE. The tax changes only with an S corp election on Form 2553, a C corp election on Form 8832, or a second member, which makes the LLC a partnership.
By default the LLC changes nothing on your federal return. An election or a second member does.

How much self-employment tax you owe under each structure

Scroll horizontally to see more columns.
Net profitNet earnings (× 92.35%)Sole proprietor SE taxSingle-member LLC SE tax
$50,000$46,175.00$7,064.78$7,064.78
$75,000$69,262.50$10,597.16$10,597.16
$100,000$92,350.00$14,129.55$14,129.55
$150,000$138,525.00$21,194.32$21,194.32
$200,000$184,700.00$28,234.30$28,234.30

Assumes a single filer, no W-2 wages, no S-corporation election, 2026 figures.3 The $200,000 row is the first where the wage base cap applies: net earnings of $184,700 clear the $184,500 cap by $200, so the Social Security portion stops there and only the 2.9% Medicare part applies above the cap.4

Why the two columns are the same

There's one computation, not two. Because the LLC is disregarded, your income runs through a single Schedule C and a single Schedule SE whether or not you ever filed anything with your state, so there's no separate LLC calculation to compare. If you want the mechanics behind that 15.3%, what is self-employment tax explains the rate, and the self-employment tax calculator calculates your own self-employment tax.

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At what income is an LLC worth it?

On tax grounds alone, there is no such income level. The LLC doesn't change the tax calculation, so it never pays for itself in tax savings. The reasons to form an LLC are non-tax ones, and do freelancers need an LLC works through them for a one-person business.

The income threshold people look for applies to the S-corporation election, which an LLC makes available. The IRS describes the mechanism when it discusses reclassifying "non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes)," and requires that S corporations "pay reasonable compensation to a shareholder-employee... before non-wage distributions may be made."5 The split between salary and distributions is where the payroll-tax saving comes from. The S corp election is a separate decision with its own math. S corp vs LLC covers it.

What does an LLC protect you from?

An LLC doesn't protect you from taxes or the IRS. The IRS's only statement on the subject is that "a Limited Liability Company (LLC) is a business structure allowed by state statute," so the protection comes from state law, not federal law.

Your state's LLC act separates business creditors from your personal assets, so a supplier chasing an unpaid invoice can generally collect only from the company. There are exceptions. A lender will often want a personal guarantee from a one-person business. Signing one makes your own assets available for that debt, which is the most common way the separation stops protecting you in practice.

Do you need an EIN for an LLC or a sole proprietorship?

The triggers are the same for both structures. With no employees, no retirement plan, and no excise obligation, neither structure requires an EIN. You can file under your Social Security number.

The difference appears once you hire. From that point an LLC must obtain and use an EIN issued in the LLC's own legal name, because the disregarded-entity rule doesn't extend to employment taxes. How to get an EIN covers the application.

How much does it cost to switch from a sole proprietorship to an LLC?

Switching costs between $35 and $500 in state filing fees, depending on where you register, plus a recurring fee in most states. How much does an LLC cost has the state-by-state table.

Several things stay the same. You keep filing Schedule C, your reserve percentage is unaffected, and your estimated payments still start at the same $1,000 threshold. How much to set aside for taxes applies the same way before and after the switch.

Frequently asked questions about LLCs and sole proprietorships

Is it better to be an LLC or sole proprietor?

Whether an LLC or a sole proprietorship is better comes down to liability exposure, not the tax bill, since a single owner is taxed the same either way. An LLC is worth its cost once you have assets to protect, contracts to sign, or a reason to keep the S-corporation election open. Below that, a sole proprietorship does the same job for nothing.

What is the biggest disadvantage of an LLC?

The biggest disadvantage of an LLC is the cost and upkeep of an entity you may not need yet. Most states charge annually or biennially, several add a franchise tax on top, and you take on filing deadlines a sole proprietor doesn't have. None of those costs lowers your tax bill.

What is a 1 person LLC called?

A one-person LLC is called a single-member LLC. The IRS treats it as a disregarded entity by default, meaning it isn't separate from its owner for income tax purposes. The income goes on the owner's Schedule C, the same as a sole proprietorship's would.

Can I change from a sole proprietorship to an LLC later?

You can change later, and most freelancers do: they form the LLC once liability exposure justifies the cost. Your federal filing doesn't change at all unless you also elect S-corporation treatment. There's no tax penalty for having waited.

Is a single-member LLC the same as a sole proprietorship for taxes?

A single-member LLC is treated the same as a sole proprietorship for federal income tax and self-employment tax, because it is a disregarded entity. The two are treated differently only for employment and certain excise taxes, where the LLC is treated as a separate entity filing in its own name.

About the author

Nicolas Straut

Nicolas Straut

Personal and business finance writer, former Forbes contributor

Nicolas Straut writes about self-employment and quarterly tax, LLC formation and costs, and tax software for Solvent. He has written about money for about ten years, including for the fintech companies NorthOne and Fundera. He files his own taxes as a freelancer. He isn't a CPA or an enrolled agent (EA).

More articles by Nicolas Straut →
This page compares federal tax treatment and general structure. Limited liability is governed by your state's LLC statute, and the protection it provides depends on state law and on how you operate the business. Confirm your situation with a qualified professional before you choose a structure. Solvent provides educational estimates, not tax advice.

Sources

  1. https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies
  2. https://www.law.cornell.edu/cfr/text/26/301.7701-2
  3. https://www.irs.gov/taxtopics/tc554
  4. https://www.ssa.gov/oact/cola/cbb.html
  5. https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
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