Tax Differences Between an LLC & a Sole Proprietorship

By April Kohl

When starting a business, there are many different factors to take into account. One of the principal concerns is that each class of business comes with different liabilities and tax requirements. Knowing the tax differences between an LLC and a sole proprietorship in your state will allow you to decide which type of business best suits your needs and circumstances.

Sole Proprietorship Tax Class

When self-employed, a person is taxed as a sole proprietor and their taxation is based solely on their net income. Filing taxes for a self-employed person is simply a matter of calculating total income, calculating total expenses and subtracting the expenses from the income to determine net income. The self-employment form is then completed based on the net income.

LLC Tax Classes

An LLC can be taxed as either a sole proprietorship, a partnership or a corporation, depending on the number of members and whether the owner or owners filed a request to be classed as a corporation. That LLC owners are taxed individually on their share of the profits and losses of the business, and can elect on how their company is taxed, that creates the major difference between an LLC and a sole proprietorship.

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Reporting to the IRS

Sole proprietors are required to present all their business reports on Schedule C of their tax returns. They do not have to concern themselves with complex corporation tax forms and avoid payroll taxes by having no employees. Single-member LLCs enjoy the same benefits, as the company is a “disregarded entity,” according to the IRS. Multi-owner LLCs return tax information on behalf of the owners, who pay tax on their “partnership income.”


The specific tax differences between an LLC and a sole proprietorship will vary from state to state in accordance with the state's individual tax requirements for both the LLC and a sole proprietorship. It is therefore advisable to consult an accountant or an attorney to discuss the benefits and requirements of both forms of business in your state.

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