LLC vs Sole Proprietorship: Which One Saves You Money?

Choosing the cheapest option up-front could cost you thousands in the long term. Meanwhile, a small initial investment might minimize taxes and personal liability costs.

In this guide, we’ll break down every cost from setup charges to hidden yearly expenses to help you pick the structure that keeps more money in your wallet.

If we’re only considering day-one expenses, a sole proprietorship wins hands down.

The bureaucracy is minimal across most states, and the only cost you might face is registering a DBA (Doing Business As), and that only applies if you want to operate under a business name rather than your own.

In contrast, an LLC requires up-front funding.

Let’s break down each option’s initial costs side by side:

There’s no doubt that sole proprietorship is cheaper on day one. However, if you’re planning to scale, the savings could be short-lived.

In the long run, an LLC can reduce self-employment taxes, protect your personal assets, and help you win bigger contracts (some clients prefer doing business with registered companies).

The simplicity of sole proprietorships makes them appealing. Beyond renewing a local business license (if required), administrative charges are generally negligible.

LLCs come with annual fees and compliance costs you need to factor in. You’ll pay a yearly report fee or franchise tax (ranging from zero to over $800 annually), plus you’ll often need a registered agent and legal counsel for compliance.

These costs aren’t huge, but they add up and are easy to overlook when you’re focused on comparing initial setup expenses.

For some business owners, the trade-offs of being a sole proprietor are obvious. But for others, the long-term benefits of an LLC (especially if you unlock S-corp status) extend far beyond the higher initial investment.

By default, sole proprietorships and single-member LLCs are taxed the same.

Both are pass-through entities, meaning your business isn’t taxed separately. All profits flow onto your personal tax return, and you pay self-employment tax on your net earnings.

Here’s the catch: as an LLC, once you’re profitable enough, you can elect S-corp status. This lets you pay yourself a salary plus distributions, avoiding self-employment tax on the distribution portion. The result? Substantial tax savings once your business hits a certain income threshold.

Here’s a quick example using the standard 15.3% U.S. self-employment tax rate:

This only makes sense if your business reaches net profits of around $60,000. Below that, the savings rarely outweigh the costs for accounting, legal counsel, payroll, and bookkeeping.

Consider this S-corp suitability guide:

• Less than $40k: Not worth it
• $40k-$60k: Depends on case-by-case expenses and CPA costs
• $60k-$100k: Yes (moderate savings)
• More than $100k: Yes (significant savings)

If your business generates substantial profits, an LLC with an S-corp election offers tax benefits that outweigh the startup and annual fees. But for businesses with thin profits, a sole proprietorship or default LLC saves more.

Personal asset protection is one of the primary reasons business owners choose an LLC over a sole proprietorship.

LLC stands for Limited Liability Company, meaning the owners’ personal liability is limited. You’re not legally liable for corporate debts or litigation.

This protection costs between $400 and $900 per year. But if you face a lawsuit, you’re covered. A sole proprietor in the same situation risks complete business failure and could lose personal savings, real estate, and more.

The key question is: what financial risk does your industry carry? A freelance writer doesn’t face the same risk as a contractor managing construction sites. For the contractor, one mistake (like leaving equipment unsecured) could lead to serious injury and a lawsuit from a client.

If your business operates in a high-risk industry, an LLC is a cost-effective insurance. But if you’re running a low-risk business, a sole proprietorship may be sufficient.

Saving money shouldn’t always be the default mindset. Sometimes you need to think about what helps you earn more.

In many industries, clients prefer working with a registered business.

Whether we like it or not, an LLC is often perceived as more reliable and professional than a sole proprietorship.

With credibility, you can justify charging more for your services, even with the same expertise. A small increase makes a big difference by year’s end.

Consider this example for a large monthly landscaping job:

• New sole proprietor landscaping business: charges $2,000 per month
• New LLC landscaping business: charges $2,100 per month (5% increase)

That small 5% increase results in $1,200 additional revenue per year from just one client. With multiple clients, LLC businesses can quickly cover formation and compliance costs.

Here’s a straightforward guide to help you choose the business structure that saves you money.

When to choose a sole proprietorship

• It’s a side hustle
• You’re testing a concept or idea
• Your business operates in a low-risk industry
• You’re looking for the simplest solution
• Your yearly profits are below $40k

When to choose a single-member LLC

• You’re pursuing bigger clients and contracts
• You want personal asset protection
• You want your business to project credibility and professionalism
• Your business is making $60k or more in yearly profits

Deciding how to register your business can feel stressful, but there’s no need for anxiety. You don’t have to choose perfectly from the start – you can always change later.

Consider transitioning from sole proprietorship to LLC if:

• You’re securing large client contracts
• You’re hiring employees
• Your profits are consistently above $60k/year
• You’re seeking stronger legal protection against liabilities

No matter what you choose, you’re never locked in. If you’re unhappy after transitioning, you can easily dissolve the LLC and return to sole proprietor status.

Alternatively, if your business is expanding rapidly, you can transition to a C-corp, which involves a more complex tax structure and formal requirements.

Sole proprietorships are perfect for new business owners seeking to minimize up-front costs and avoid tax complexity.

However, once you’re profiting well, an LLC can definitely save you money.

You’re the one who can make the best decision for your business. It depends on your current context, industry, and profits – information that only you have.

The smartest choice is to make decisions based on your current business situation, rather than where you want it to be in the future.

If you’re starting a new business or looking to transition to an LLC, companies like ZenBusiness can simplify and make the process more affordable. They handle all the legal documentation for you, letting you focus on growing your business instead of navigating complex legal forms.