Free comparison
Find out whether an LLC or sole proprietorship is the right business structure for your situation.
Choosing between an LLC and a sole proprietorship is one of the first — and most important — decisions a new business owner makes. Both structures let you operate a business, but they differ significantly in liability protection, tax treatment, and administrative requirements.
A sole proprietorship is the default: if you start doing business without forming an entity, you are a sole proprietor. It is simple and free to set up, but your personal assets (home, car, savings) are exposed to business debts and lawsuits.
An LLC (Limited Liability Company) creates a legal separation between you and your business. If someone sues your business or it takes on debt, your personal assets are generally protected. The trade-off is formation costs, annual fees, and slightly more paperwork.
This quiz evaluates seven key factors that influence which structure is right for you: asset exposure, revenue level, partnerships, industry liability risk, hiring plans, funding needs, and tax flexibility.
The recommendation includes a confidence level (strong, moderate, or slight) so you can weigh the strength of the recommendation against your specific situation.
California
LLC formation costs $70. Annual franchise tax of $800 minimum, even if the LLC earns no income. One of the more expensive states for LLCs.
Texas
LLC formation costs $300. No state income tax, but franchise tax applies to businesses with revenue over $2.47M. Good state for small LLCs.
New York
LLC formation costs $200. Publication requirement can add $1,000–$2,000 in some counties (mandatory legal notices in newspapers).
Florida
LLC formation costs $125. Annual report fee of $138.75. No state income tax. One of the more affordable and business-friendly states.
Illinois
LLC formation costs $150. Annual report fee of $75. Straightforward process with reasonable costs.
Liability protection. In a sole proprietorship, you are personally liable for all business debts and legal claims. An LLC creates a legal barrier between your business and personal assets, so a lawsuit against your business generally cannot reach your home or savings.
State filing fees range from $50 to $500 depending on your state. Some states also charge annual fees ($50–$800/year). Many online services offer LLC formation for $0 plus state fees.
Yes. You can form an LLC at any time and transfer your business operations into it. However, existing liabilities from your sole proprietorship period will not be retroactively protected.
Most states do not legally require one for single-member LLCs, but you should have one. An operating agreement documents ownership structure, management rules, and dissolution terms. Without one, state default rules apply.
By default, a single-member LLC is taxed identically to a sole proprietorship (pass-through on Schedule C). The key difference is that LLCs can elect S-corp taxation, which may reduce self-employment taxes on profits above a reasonable salary.
Not necessarily. If your business has low liability risk, minimal assets, and modest revenue, a sole proprietorship may suffice. Consider an LLC when you have significant personal assets to protect or when revenue justifies the annual fees.
This tool provides general information, not legal advice. Laws vary by jurisdiction and individual circumstances. Consult a qualified attorney for advice specific to your situation.