Once you've picked a name, the next question is how to structure the business. Here's a plain-English comparison of the two most common choices.
A sole proprietorship is the simplest structure: if you start doing business by yourself and don't form anything else, you're automatically one. There's little to no paperwork to begin, and your business income is reported on your personal tax return.
The trade-off is that there's no legal separation between you and the business. If the business is sued or owes money, your personal assets — like your savings or car — can be at risk.
An LLC is a formal business entity you register with your state. Its biggest benefit is in the name: limited liability. In most cases it separates your personal assets from business debts and lawsuits, offering a layer of protection a sole proprietorship doesn't.
LLCs also tend to look more credible to customers, partners, and banks, and they offer flexibility in how you're taxed. The trade-off is a bit more paperwork and cost: a state filing fee, possible annual fees, and a few ongoing requirements.
| Sole proprietorship | LLC | |
|---|---|---|
| Setup | Automatic, minimal | File with your state |
| Cost | Little to none | State filing fee (varies) |
| Personal asset protection | No | Yes, in most cases |
| Paperwork | Very little | More, plus possible annual filings |
| Credibility | Informal | More established |
A useful rule of thumb:
Many founders start as a sole proprietor and form an LLC as the business grows — and many form an LLC right away for peace of mind. Online formation services can handle the state filing for you for a modest fee if you'd rather not do it yourself.
Generate a memorable, available business name before you file anything.
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