What is the difference between an LLC and a sole proprietorship?

The fundamental difference is liability protection: an LLC creates a legal separation between your personal assets and business debts, while a sole proprietorship offers zero liability protection. If your business is sued or goes into debt as a sole proprietor, creditors can pursue your personal bank accounts, home, and car. With an LLC, only business assets are at risk.

Beyond liability, LLCs offer tax flexibility (you can elect S-Corp taxation to reduce self-employment tax), enhanced credibility with clients and vendors, easier access to business banking and credit, and a formal operating structure that facilitates bringing on partners. The tradeoff is cost — an LLC requires state filing fees ($50-$500), annual maintenance ($0-$800/year), and more complex tax filing. For most businesses generating over $5,000 annually, the liability protection alone justifies the LLC cost.