Sole proprietor vs LLC: liability, taxes and cost (2026)
Edited by Moe Ameen · Published
A sole proprietorship is the simplest way to run a business, but the SBA says you can be held personally liable for its debts. An LLC protects your personal assets in most cases. By default the IRS treats a single-member LLC as a disregarded entity reported on the owner's return, and LLC members pay self-employment tax. The LLC's extra cost is state fees, with a $100 median filing fee.
Key takeaways
- The SBA says sole proprietors can be held personally liable for business debts.
- An LLC protects personal assets in most instances, according to the SBA.
- By default, a single-member LLC's activity goes on the owner's federal tax return.
- Some business credit products we checked only accept LLCs and corporations.
What's the main difference between a sole proprietorship and an LLC?
Liability. A sole proprietor can be held personally liable for business debts, while an LLC protects personal assets in most instances.
The SBA calls a sole proprietorship easy to form, with complete control, and says it suits low-risk businesses and owners testing an idea [1]. The trade-off is personal liability. With an LLC, the SBA says your vehicle, house and savings won't be at risk in most instances if the LLC faces bankruptcy or lawsuits [1].
How is an LLC taxed compared with a sole proprietorship?
By default, a single-member LLC is a disregarded entity whose activity goes on the owner's tax return. A multi-member LLC is taxed as a partnership.
That's the IRS's default classification [2]. A multi-member LLC can file Form 8832 to be treated as a corporation instead [2]. Either way, the SBA notes that LLC members are considered self-employed and pay self-employment tax [1].
How much more does an LLC cost than a sole proprietorship?
The state filing fee, with a median of $100, plus any recurring report or tax. A sole proprietorship has no state formation filing.
LLC filing fees run from $35 in Montana to $500 in Massachusetts, and most states add a recurring report. A few, like California with its $800 annual tax, cost much more each year. Look up your state in LLC cost by state.
Does a sole proprietorship or an LLC make building business credit easier?
Some products only accept LLCs and corporations. Bluevine's line of credit, Ramp's card and CreditStrong's business account all exclude sole proprietors.
Each row in the table below comes from the company's own eligibility page. A sole proprietor isn't shut out of every product, but forming an LLC opens more of them.
Do I need a DBA as a sole proprietor?
If you do business under a name other than your own, the SBA says most states require you to register that DBA.
A DBA, also called a trade name or assumed name, may need registering with your state, county or city. The SBA notes a DBA gives no legal protection by itself [3].
Glisten check
Business credit products that require an LLC or corporation
| Product | Business types it accepts |
|---|---|
| Bluevine line of credit | Corporation or LLC [4] |
| Brex corporate card | US-incorporated companies, including LLCs [7] |
| CreditStrong CS Business | LLC, partnership or corporation [6] |
| Ramp corporate card | Corporation, LLC or LP; no sole proprietorships [5] |
Is this right for you?
Best for
- Owners deciding whether to form an LLC before building business credit.
- Sole proprietors weighing personal liability against state fees.
Not ideal for
- Tax planning for your specific situation, such as electing corporate taxation. A tax professional can run your numbers.
Frequently asked questions
Is a sole proprietor personally liable for business debts?
Yes. The SBA says you can be held personally liable for the business's debts and obligations [1].
How is a single-member LLC taxed?
By default the IRS treats it as a disregarded entity, and its activity goes on the owner's federal tax return [2].
Do LLC members pay self-employment tax?
Yes. The SBA says LLC members are considered self-employed and must pay self-employment tax [1].
Can a sole proprietor get a Bluevine line of credit?
Bluevine lists Corporation or LLC as an eligibility requirement [4].
What does it cost to form an LLC?
State filing fees run from $35 to $500. See the LLC cost by state lookup for yours.
How we know this
On October 28, 2026 we read the SBA's guide to choosing a business structure and registering a business, the IRS's page on single-member LLCs, and each company's own eligibility page for the products in the table.
- Choose a business structure, SBA. Checked October 28, 2026.
- Single member limited liability companies, IRS. Checked October 28, 2026.
- Register your business, SBA. Checked October 28, 2026.
- Line of credit, Bluevine. Checked October 28, 2026.
- Applying and signing up for Ramp (US), Ramp. Checked October 28, 2026.
- Business FAQ, CreditStrong. Checked October 28, 2026.
- Build business credit, Brex. Checked October 28, 2026.