Sole Proprietorship vs. LLC: What Self-Employed Workers Need to Know

by | Aug 15, 2023

Business owners have plenty of decisions to make before opening the doors to their new endeavor. From thinking about benefits for employees to payment structure, owners are often inundated with decisions to make.

With all of this to think about, they frequently forget about one of the most important aspects of their business: legal structure. Sole proprietorship and Limited Liability Corporation (LLC) are two common options, and each one has its own pros and cons.

Should your business be formed as sole proprietorship vs LLC? If you are in the early stages of forming your business, here is what you need to know about the two structures to help you make the right choice.

What to Know About a Sole Proprietorship

For those who have been employees in the past, you may already be familiar with a 401(k), and this Solo(k) option is an easy transition. It is designed for self-employed business owners who generally don’t have employees and comes without age or income restrictions.

The Solo(k) offers a high contribution limit for those who have put off retirement planning until the last minute. In 2023, you can contribute up to $66,000 with catch-up contributions of $7,500 for individuals aged 50 or older. 


  • Ultimate authority and control over your business to grow
  • Receive all business profits to use as you see fit
  • Low startup costs
  • Easy to change legal structure later


  • On the hook for any business debts entirely on your own
  • May find your personal assets on the line with creditors
  • More challenging to raise capital

What to Know About a Limited Liability Corporation (LLC)

If you want a bit more protection and separation between your personal and business assets, it might be more beneficial to form your business as a LLC.

Known as a Limited Liability Corporation, this business structure makes it clear just what you get: less liability for business issues. It creates an entirely new business entity that is not tied to your personal bank account. That said, if you fail to properly separate your business and personal assets, your LLC can lose its limited liability in what’s called “piercing the corporate veil.”

This is a smart move if you have more than one owner, whereas partnerships and other owners are not permitted with a sole proprietorship.

Keep in mind that you will need to file with your state to form an LLC. It is not as simple as waking up one day and deciding to start a business. It will cost a small registration fee and you will need to wait until the ink dries on your paperwork.


  • Can have more than one owner
  • Separate from your personal assets
  • Does not influence your assets if your business declares bankruptcy
  • Several tax options, but all are flow-through taxations


  • Renewal fees and registration fees with the state
  • Added challenges when transferring ownership

Sole Proprietorship vs. LLC: What’s Better for the Self-Employed?

Sole proprietorships and LLCs are starkly different business models that every owner faces. Which is the right move for someone who is making the leap to becoming self-employed? In general, a sole proprietorship is the easiest way to start your business as it requires no paperwork or even fees for registration.

However, it limits the number of owners you can have to just yourself and your spouse, plus forces you to be personally accountable for anything that goes wrong in the business.

On the other hand, an LLC offers protection for owners. It keeps business and personal assets distinctly separate and generally does not allow creditors to go after your personal assets. For the self-employed, there are also many tax benefits to an LLC if you decide to be taxed as an S-Corp or C-Corp.

What do you need to know about the differences between these two legal entities when it comes to retirement? One thing to note is that no matter what entity you choose, you must treat all of your employees equally, including yourself. You cannot create a retirement account for yourself and not for your employees or partners.

One downside to retirement plans with an LLC is what happens if your business has a net loss for the year. When this figure is tallied at the end of the year, a net loss means that the LLC or even a partnership does not have any earned income. As a result, you cannot make salary deferral contributions or receive employer contributions. This is why many businesses choose to wait until the end of the year to make their contributions to a retirement savings plan.

Plan for Tomorrow

No matter how you structure your business, planning for the future is critical. Eventually, there will come a day when you want to retire from your work regardless of how much you love it. If you plan to do so, you need to start saving as early as possible to live comfortably in retirement. A Solo(k) is a great option for the self-employed.

These retirement savings accounts allow you to save up more than you would be able to in more traditional accounts such as IRAs. This allows you to save more quickly for retirement and potentially turn in the towel earlier than you might have otherwise. Consult with an expert to figure out if a Roth or traditional Solo(k) is the right move for you based on your unique tax situation.

When you are ready to face retirement head-on and jumpstart your savings, you need the help of an expert to make sure you are getting everything you need. Retire4one makes setting up and managing your Solo(k) easier than ever. Contact us today to learn more about whether this type of retirement plan is the right fit for your business!