What's the difference between an LLC and a sole proprietorship?
If you’re working for yourself and haven’t filed anything with the state to create a business entity, you’re already a sole proprietorship. It’s the default. No paperwork, no formation cost, no annual state fees. You report your business income and expenses on Schedule C of your personal tax return and pay self-employment tax on the profit.
An LLC is a legal entity you create by filing articles of organization with the California Secretary of State. The main benefit is liability protection. If something goes wrong on a job and you get sued, the LLC creates a legal separation between your business assets and your personal assets. Your house, your personal savings, and your truck (if it’s titled personally) are harder to reach in a lawsuit. As a sole proprietor, there is no separation. Everything you own is fair game.
For anyone in the trades or construction, that liability protection matters. You’re working on other people’s property, using tools and equipment that can cause damage, and dealing with subcontractors and employees. Insurance covers a lot, but having the LLC as an additional layer of protection is worth considering.
On the tax side, a single-member LLC doesn’t change much by itself. The IRS treats it as a “disregarded entity,” which means you still file Schedule C just like a sole proprietor. The income flows to your personal return the same way. The LLC doesn’t automatically save you on taxes.
The tax savings people hear about usually come from electing S-corp status, which is a separate step. That’s worth exploring once your net profit is consistently high enough to justify it, but it adds complexity and payroll requirements. A CPA who works with trade businesses can help you figure out when that election actually makes sense for your situation rather than just following generic advice you found online.
The biggest drawback of an LLC in California is cost. The state charges a minimum $800 franchise tax every year regardless of whether you made any money. That hits hard if you’re just getting started or if your business is seasonal. A sole proprietorship has no equivalent fee.
There are also practical reasons to form an LLC. Some general contractors require subs to have an LLC before they’ll work with them. Lenders and suppliers may take you more seriously. And it keeps your business looking professional, which matters when you’re bidding larger jobs.
The bottom line is that a sole proprietorship is simpler and cheaper to maintain, while an LLC gives you liability protection and more flexibility as you grow. Most trade business owners benefit from forming an LLC once the business is generating steady revenue, but the timing depends on your specific numbers. If you’re not sure where you stand, getting tax strategy guidance before making the decision will save you from either paying the $800 too early or waiting too long and leaving yourself exposed.
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More Questions
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Most small businesses should hire a bookkeeper as soon as they have regular income and expenses flowing through the business. Waiting until tax time or until things feel out of control usually means paying more to fix problems that proper bookkeeping would have prevented.
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It depends on how the LLC is taxed. You issue a 1099 to LLCs taxed as sole proprietorships or partnerships, but generally not to LLCs taxed as S-corps or C-corps. A W-9 from the payee tells you which situation you're dealing with.
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Long Beach requires a business license tax based on gross receipts, renewed annually. Beyond that, California imposes franchise tax minimums, state income tax, and specific contractor licensing obligations.
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You're not legally required to as a sole proprietor, but you absolutely should. Mixing personal and business transactions makes bookkeeping harder, costs you deductions at tax time, and creates problems if you ever get audited.
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Set up each client as a sub-customer or project in your accounting software so every invoice and expense ties back to a specific account. Use recurring invoices for regular clients and review profitability per account monthly.
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