Cost comparison
LLC vs sole proprietorship: what each really costs (2026)
A side-by-side look at the startup and yearly costs of an LLC versus a sole proprietorship — state fees, DBA filings, taxes, and what you actually get for the extra money.
Affiliate disclosure: This article may include affiliate links. If you purchase through them, we may earn a commission at no extra cost to you. Full disclosure.
Not legal or tax advice. General information only.
Short answer
A sole proprietorship costs $0 to create — you become one automatically the moment you start doing business without registering another entity type (SBA). An LLC costs a state filing fee to form (roughly $35–$500 depending on the state; see our state comparison table) plus any recurring state report fee or entity tax.
For many single-owner businesses, the federal income tax result is the same either way: by default, the IRS treats a single-member LLC as a "disregarded entity" and you report it on Schedule C, and you pay self-employment tax "in the same manner as a sole proprietorship" (IRS). So the main thing the LLC's extra cost buys is a separate legal entity and the liability protection that comes with it — not a tax cut.
This is general information, not legal or tax advice.
Side-by-side cost comparison
| Cost item | Sole proprietorship | Single-member LLC |
|---|---|---|
| Create the business | $0 — automatic | State filing fee (e.g. Ohio $99, Florida $125, Texas $300) |
| Use a brand name | DBA / fictitious-name filing if you don't use your own legal name (e.g. Florida $50) | LLC name is registered at formation; a DBA is only needed for an extra brand name |
| Registered agent | Not required | Required in every state — $0 if you serve yourself, or a commercial agent (often about $100–$300/yr, private market) |
| Recurring state filing | Usually none at the state level (DBAs may need renewal) | Annual/biennial report or entity tax in most states (e.g. Florida $138.75/yr, California $800/yr FTB tax + $20 biennial statement) |
| EIN | Free; often not required if you have no employees | Free; often needed for banking or employees (SBA) |
| Federal income tax (default) | Schedule C on your Form 1040 | Same — Schedule C as a disregarded entity (IRS) |
| Self-employment tax | 15.3% (12.4% Social Security + 2.9% Medicare) on net earnings | Same by default (IRS) |
| Personal liability | Unlimited — business debts are your debts (SBA) | Owners generally not personally liable for business debts (SBA) |
Commercial registered-agent prices are private-market estimates, not government fees. Everything else in the table comes from the official sources linked below.
Worked example: Florida
Florida is a useful example because both the LLC and fictitious-name fees are on one official fee page (Florida Division of Corporations):
| Sole proprietor using a brand name | Florida LLC | |
|---|---|---|
| Year 1 state fees | $50 fictitious-name registration | $125 ($100 Articles of Organization + $25 registered-agent designation) |
| Each later year | $0 state fee until the fictitious name needs renewal ($50 renewal) | $138.75 annual report |
| Late penalty to watch | — | Annual report received after May 1 costs $538.75 |
Over the first three years, a DIY Florida LLC costs about $402.50 in state fees ($125 + $138.75 + $138.75), versus about $50 for a sole proprietor with a fictitious name. Details: Florida LLC cost.
Worked example: California
California is where the gap is widest. Every LLC organized or doing business there must pay an $800 annual tax to the Franchise Tax Board, "even if you are not conducting business," until the LLC is cancelled. LLCs with California income of $250,000 or more also owe an additional LLC fee starting at $900 (FTB). The temporary first-year exemption only covered tax years beginning in 2021 through 2023.
Add the $70 Articles of Organization fee and the $20 Statement of Information, and a new California LLC typically pays about $890 in state fees and taxes in year one — before any registered agent or service fees. A sole proprietor pays none of those. Details: California LLC cost.
Lower-cost states
In states with no recurring LLC report, the gap almost disappears after formation. For example, Ohio charges $99 to form an LLC and has no LLC annual or biennial report with the Secretary of State (Ohio LLC cost). Kentucky charges $40 to form and $15 per annual report (Kentucky LLC cost).
Browse every state we've verified in the state comparison table, or see cheapest states to form an LLC.
Costs that are the same either way
- Business licenses and permits — these depend on your activity and city/county, not your entity type (SBA).
- Self-employment tax — unchanged by forming a default-taxed LLC. Some LLC owners later elect S-corp tax treatment (IRS Form 2553), which brings payroll and extra tax-return costs; talk to a tax professional before doing that.
- Business insurance — an LLC does not replace insurance. The SBA notes that entity liability protection "has limits" and that insurance fills gaps (SBA).
- Federal BOI reporting — FinCEN's final rule (effective August 14, 2026) exempts U.S.-created companies from beneficial ownership reporting, so a new domestic LLC has no BOI filing or fee (FinCEN). Ignore mailers that ask you to pay to file one.
When the extra LLC cost is usually worth it
The SBA describes sole proprietorships as a good fit for low-risk businesses and for owners testing an idea, and LLCs as a fit for medium- or higher-risk businesses and owners with significant personal assets they want to protect (SBA). Other practical reasons owners pay for an LLC:
- Clients, platforms, or landlords that prefer contracting with an entity
- Keeping business and personal finances cleanly separate (business bank account in the LLC's name)
- Planning to add a partner later (a multi-member LLC is taxed as a partnership by default — IRS)
If you're testing a side hustle in a high-fee state like California, staying a sole proprietor until revenue justifies the $800/yr tax is a common choice — but weigh it against your liability exposure.
DIY vs formation service
You can file the LLC paperwork yourself and pay only state fees. Formation services such as ZenBusiness, Northwest Registered Agent, or Bizee charge a service fee on top of the same state fees, and often bundle registered-agent service. We may earn a commission if you use our links (disclosure).
Sources
- U.S. Small Business Administration — Choose a business structure / Launch your business
- IRS — Single member limited liability companies
- IRS — Self-employment tax (Social Security and Medicare taxes)
- Florida Division of Corporations — Fees
- California Franchise Tax Board — Limited liability company
- FinCEN — Beneficial ownership information
- Ohio Revised Code § 111.16 (LLC filing fee)
- Kentucky SOS — Fees
Checked October 29, 2026.