LLC vs Sole Proprietorship: Key Differences in Running and Growing

The biggest difference between an LLC and a sole proprietorship is legal identity. An LLC exists separately from you once your state approves it. A sole proprietorship doesn't exist apart from you at all: the SBA notes that if you do business without registering another structure, you're automatically a sole proprietor, and you're personally responsible for the business's debts.

That one distinction ripples through almost everything you do as an owner. This article skips the general pros and cons and looks instead at how the two structures differ in practice, from signing your first contract to eventually selling or closing the business.

Differences at a glance

Your name, contracts and paperwork

As a sole proprietor, every contract, lease and supplier account is in your own name. If you trade as something other than your legal name, say Riverside Lawn Care instead of Jordan Smith, you'll usually register a DBA, but the DBA is just a label. You still sign as yourself.

An LLC signs as itself. You sign on its behalf, typically adding your title, such as Jordan Smith, Member, Riverside Lawn Care LLC. That small detail matters. It shows clients and suppliers that they're dealing with a company, and it supports the separation between your business and personal life.

Banking and day-to-day money

A sole proprietor can legally run business income through a personal account, though it makes bookkeeping and taxes much harder. Many banks will open a business account for a sole proprietor, often using a DBA.

An LLC should always have its own bank account in the company's name. Keeping LLC money separate isn't just tidy; it helps preserve the liability protection that is the main reason for forming an LLC in the first place. Pay yourself by transferring money from the business account rather than spending business funds on personal costs.

Hiring help

Both structures can hire employees. Either way, you'll need an EIN, and you'll take on payroll taxes, withholding and the usual employer paperwork.

The difference is exposure. In a sole proprietorship, if an employee causes harm while working or the business can't meet its obligations, claims can reach you personally. An LLC generally keeps those business liabilities with the company, which is one reason many owners form one before their first hire.

Adding a partner or co-owner

This is where the two structures differ the most. A sole proprietorship, by definition, has one owner. If you start running the business with someone else and don't form an entity, you're generally treated as a general partnership, which leaves each partner personally exposed, including for the other's business decisions.

With an LLC, adding someone is a defined process. You admit a new member, ideally under the terms of your operating agreement, which spells out ownership shares, decision-making and what happens if someone wants out. If you think you'll ever bring in a partner, an LLC makes that step far cleaner.

Borrowing and raising money

The SBA points out that it can be hard to raise money as a sole proprietor, because you can't sell shares and banks are hesitant to lend to sole proprietorships. Loans are based on you, your credit and your personal assets.

An LLC can open its own accounts, build a payment history with suppliers and present its own financial records to lenders. That can help, but it rarely removes the owner from the picture. Small business lenders and landlords commonly ask owners to personally guarantee loans and leases, even for an LLC.

Selling the business

Because a sole proprietorship isn't a separate entity, there's nothing to sell except what the business owns: equipment, inventory, customer lists, the business name, maybe a phone number and website. The buyer typically sets up their own business and has to renegotiate contracts and accounts.

An LLC gives you more options. You can sell the assets, or the buyer can purchase your ownership interest in the company itself, taking over its name, contracts and accounts as a going concern. How that's best structured depends on taxes and the deal, so get professional advice before a sale.

If the owner can't continue

A sole proprietorship generally ends with its owner. If you become unable to work or pass away, the business assets are handled as part of your personal affairs, and someone else would need to start a new business to carry on.

An LLC can plan ahead. Your operating agreement can set out what happens if a member leaves, becomes unable to participate or dies, such as who can buy their share and at what price. Without that agreement, the SBA notes that some states may require an LLC to be dissolved and re-formed when membership changes, which is a good reason to write one.

Closing down

Closing a sole proprietorship is informal. You stop doing business, settle your debts, file your final business taxes on your personal return and cancel any DBA, licenses, permits and tax accounts.

Closing an LLC takes more steps. You'll typically file dissolution paperwork with your state, pay or settle the company's debts, file final tax returns and close its bank accounts. Don't skip the formal dissolution. Until the state records it, annual report deadlines and fees may keep coming.

Which differences matter for you?

Think about where your business is heading, not just where it is today. If you plan to stay solo, keep things small and carry little risk, a sole proprietorship's simplicity is hard to beat. If you expect to hire, take on a partner, borrow or one day sell, an LLC is built for those moves. For a deeper look at liability, taxes and costs, see our guide on LLC vs sole proprietorship pros and cons.

Nothing here is legal or tax advice for your specific case. Because state rules differ, run your plans past a local business attorney or CPA.