When you’re working as an independent contractor, choosing the right business structure is more than a formality. It’s a strategic decision that impacts your taxes, liability, client relationships, and global scalability.
Two of the most common structures for solo professionals are sole proprietorships and limited liability companies (LLCs). While both offer unique advantages, the right choice depends on how you work, where you work, and how you plan to grow.
In this article, Remote breaks down the difference between an LLC and sole proprietorship to help you make an informed decision, especially if you’re working with international clients or managing remote work across borders.
What is a sole proprietorship?
A sole proprietorship is a widely used business structure for individuals working independently. In many countries, including the US, UK, Canada, and Australia, if you start earning income on your own without registering as a separate legal entity, you're automatically considered a sole proprietor.
This structure is especially common among freelancers, consultants, gig workers, and independent contractors due to its simplicity and low cost of entry.
Key benefits of a sole proprietorship
- Easy to set up: In most jurisdictions, there’s no formal incorporation process. You may only need to register a business name or obtain a local license.
- Complete control: You make all decisions, keep all profits, and don’t need to consult partners or shareholders.
- Simple tax filing: Business income is reported directly on your personal income tax return, avoiding corporate filings. In the U.S., this is typically done via Schedule C.
- Low administrative burden: There are minimal compliance requirements — no separate corporate taxes, annual reports, or board meetings.
Drawbacks of a sole proprietorship
- No legal separation: You and your business are legally the same. If the business is sued or accrues debt, your personal assets (home, savings, etc.) are at risk.
- Limited access to capital: Sole proprietors can’t issue shares and may face challenges securing business loans or attracting investors.
- No business continuity: The business ceases to exist if the owner retires, becomes incapacitated, or dies, unless assets are formally transferred.
Sole proprietorships are ideal for self-employed professionals who want to launch quickly, test business ideas, or operate with minimal overhead. However, they may not be suitable long-term for those seeking liability protection, investment, or international growth.
What is an LLC?
A Limited Liability Company (LLC) is a formal business structure that creates a legal distinction between the business and its owner. Forming an LLC means your personal assets are generally protected if your business faces lawsuits or debts, which is a major advantage over a sole proprietorship.
LLCs are a popular choice among independent contractors, freelancers, and small business owners, especially those working across borders or with enterprise clients.
Key benefits of an LLC
- Limited personal liability: Your personal finances (e.g., savings, home, car) are typically shielded from business-related lawsuits or debts.
- Professional credibility: Many clients prefer working with registered business entities. An LLC can improve how your services are perceived, especially in B2B contracts and international engagements.
- Flexible taxation options: By default, single-member LLCs are taxed similarly to sole proprietorships (pass-through taxation). In some countries, such as the US, you can elect to be taxed as an S corporation or C corporation, depending on what’s most advantageous.
- Business and financial separation: An LLC encourages proper bookkeeping with distinct business accounts, improving compliance and operational organization.
Drawbacks of an LLC
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Formation costs and paperwork: Registering an LLC typically requires filing articles of organization, paying government fees, and possibly creating an operating agreement. These steps vary by country and region.
- Ongoing compliance: Most LLCs must file annual reports, renew business licenses, and meet specific recordkeeping obligations. These vary by jurisdiction — for instance, Delaware LLCs differ significantly from California LLCs.
- Potential tax complexity: Depending on where the LLC is registered and how it earns income (especially internationally), contractors may face additional taxes such as VAT, payroll tax, or corporate income tax, requiring expert guidance.
An LLC is well-suited for contractors looking to limit liability, scale their business, or engage with clients who expect a more formalized relationship. It’s a strong choice for those planning to grow globally, manage higher revenue, or protect personal assets from business risks.
LLC vs sole proprietorship: Compare the pros and cons
Choosing the right business structure — whether an LLC or sole proprietorship — depends on your goals, risk tolerance, and how you plan to operate. Here’s a breakdown of how the two compare across different factors:
|
Category |
Sole proprietorship |
Limited liability company (LLC) |
|
Liability protection |
No separation — the owner is personally liable for business debts and legal claims. |
Provides a legal shield between the owner and the business — personal assets are protected. |
|
Taxation |
Pass-through taxation — profits reported on personal tax return. |
Default is pass-through, but can elect corporate taxation in some countries (e.g., U.S.). |
|
Setup complexity |
Simple and low-cost — minimal paperwork or registration required. |
Requires government registration, filing fees, and legal documentation. |
|
Ongoing compliance |
Few formal requirements — minimal reporting and recordkeeping. |
Subject to annual reports, renewals, and compliance rules (varies by jurisdiction). |
|
Credibility |
May appear informal to clients, especially for international or enterprise work. |
Seen as more professional and trustworthy — preferred by many clients and partners. |
|
Access to funding |
Limited — can’t raise capital through equity or issue shares. |
Easier to attract funding, apply for loans, or build business credit over time. |
|
Business continuity |
Business ends if the owner exits, retires, or passes away. |
LLC can continue to operate or transfer ownership more easily. |
Factors to consider when choosing your business structure
When deciding between an LLC and a sole proprietorship, independent contractors should consider how their business goals, risk profile, and client expectations align with each structure:
- What’s my liability exposure?
If your services carry legal or financial risk (e.g., legal consulting, software development, financial advising), an LLC offers limited liability protection, shielding your personal assets from business-related claims. However, if your work has relatively low risk — such as design or tutoring — a sole proprietorship may be enough, especially when starting out. - Am I just getting started or testing an idea?
If you’re in the early stages, with limited income or clients, a sole proprietorship is faster and cheaper to set up, with minimal paperwork and tax filing requirements. - Do I plan to grow, hire, or raise capital?
If you intend to scale your operations, work with partners, or pursue business loans, forming an LLC offers more flexibility and credibility with banks and investors. - What do my clients expect?
Some clients prefer working with registered business entities like LLCs for compliance and invoicing reasons. On the other hand, many freelancers and contractors work successfully as sole proprietors, especially with short-term projects. - Am I operating internationally?
If you’re working with clients in multiple countries, you’ll need to navigate cross-border regulations, local tax rules, and contractor classification risks. While an LLC may offer a more formal structure for managing international contracts and finances, many sole proprietors also operate globally — and stay compliant with the right partner.
Remote Contractor Management supports both sole proprietors and LLCs, helping you handle international onboarding, localized contracts, multi-currency payments, and legal compliance.
Why many contractors start with a sole proprietorship
For new contractors, a sole proprietorship may be the most practical starting point. It’s fast, inexpensive, and allows you to test the waters. Once your business grows, your risk increases, or you take on international clients, forming an LLC may become the smarter choice.
The good news? You can always transition from a sole proprietorship to an LLC later.
Contractor management made simple
Whether you operate as a sole proprietor or have formed an LLC, managing your contracting business on a global scale brings added complexity — from compliance and classification risks to onboarding and international payments.
Remote Contractor Management helps you stay focused on what matters most: doing your best work, anywhere in the world. With Remote, independent professionals can:
- Create localized contracts that meet country-specific legal requirements
- Automate onboarding to streamline new client engagements
- Get paid in 70+ currencies, always on time and in full compliance
- Reduce misclassification risks with built-in legal safeguards and expert support
Whether you're just getting started as a freelancer or scaling an international contractor business, Remote gives you the tools to manage global operations confidently — no matter your business structure. Get started with Remote Contractor Management today.