A sole proprietor is literally anyone who decides to start a business. The moment you accept payment for a service or product, you become a sole proprietor in the eyes of the IRS. It's the simplest means of paying taxes as small business owner. Basically, all profits and loss are "passed" through the business to your personal taxes.
A sole proprietor has zero protection against two things: 1) getting sued and 2) debt. If your business gets sued or goes bankrupt, it's not the company that takes the hit ... it's you. For example, creditors can swoop in and take not only your business assets but your personal assets as well—like your house, car, television, and welcome mat.
Assuming your LLC is set up by a competent lawyer, the "limited liability" of an LLC protects you from both of these consequences. The problems begin and end with the business.
- There are two types of corporations: an LLC and an INC. They are very different entities.
- A sole proprietor (and corporation) pays income taxes quarterly.
- Under an LLC, you are still considered a "sole proprietor" or a "partner" in the eyes of the IRS.
- You will pay yearly state incorporation fees (fees for an LLC are typically minimal.)
You will hear a lot about "double taxation" as a corporation (INC)—this simply refers to being taxed twice on the same income for corporate taxes and personal income taxes.
Sole proprietors and LLCs are not double taxed—in other words, the corporation is not taxed, you are. BUT there's a catch ... you ARE subject to "self-employment" tax in addition to income tax. Technically, you still get taxed twice. Gotta love the IRS (but their customer service is outstanding. No kidding.)
After you create your LLC, you can reduce your tax liability by having your accountant file an "S-Corp" election with the IRS ... this is not a legal entity, it's an IRS designation.But it'll save you a bundle on taxes.
Anyway, to answer your question in a word ... An LLC is "safer".
I've been an LLC, in one incarnation or another, for 24 years, and the best advice I can give you is that the smartest decision you can make is to find a good accountant (not H&R Block and don't do your own taxes).
The second best advice I can impart is to work with a lawyer who specializes in corporate law to set up your LLC (this typically costs about $500)—While it's possible to set up an LLC on your own using online services that offer bargain rates and quick turnarounds, do NOT do this.