Understanding What is the Difference Between Sole Proprietor and LLC

If you’re earning money on OnlyFans, you’re not just a creator. You’re running a business. And when it comes to taxes and protection, the way you set up your business matters. A lot. Many small business owners wonder what is the difference between sole proprietor and LLC, especially when starting out and choosing the right business entity.

Introduction to Business Structures

When starting a business, one of the most important decisions you’ll make is choosing the right business structure. This decision can affect how you pay taxes, your personal liability, and the overall success of your business. Two popular business structures are the sole proprietorship and the limited liability company (LLC). A sole proprietorship is an unincorporated business owned and operated by one person, while an LLC is a legal entity that provides liability protection for its owners. Understanding the differences between these two structures is crucial for making an informed decision.

What Is a Sole Proprietor?

A sole proprietor is someone who owns an unincorporated business alone. If you didn’t register a company, you’re likely a sole proprietor already. This is the most common structure for small business owners, especially those just starting out. A sole proprietorship requires minimal paperwork and legal formalities, making it a cost-effective and simple option for many small business owners.

Benefits:

• Easy and free to set up
• No legal documents required
• Report income on your personal tax return
• Great for low risk businesses and side hustles
• Complete control over business decisions, allowing for quick and independent decision-making

Drawbacks:

• No legal protections
• You are personally liable for all business debts
• Your personal assets (like your savings or car) could be at risk if you’re sued
• Unlimited liability, meaning you are personally responsible for all business debts and legal issues
• Can feel less official when working with brands or clients

Sole proprietorships tend to work well when you’re testing a business idea or just starting out. But they offer no separation between your personal life and business operations.

What Is an LLC?

An LLC, or Limited Liability Company, is a separate entity formed through the state. It separates your personal and business lives. If the business gets into legal trouble, your owner’s personal assets (like your car, savings, or home) are generally protected.

Benefits:

• Protects your personal assets from business debts
• Can be taxed as a pass-through entity or elect S-corp status for tax benefits
• Adds credibility with banks, platforms, and brand partners
• Still simple to run if you’re the only owner (a single-member LLC)
• Flexibility in ownership structure, allowing for more than one owner if needed

Drawbacks:

• Setup involves filing fees and paperwork
• Initial filing fee, which can range from $50 to $500, depending on the state
• You’ll need an operating agreement, even if you’re the only member
• Must pay state ongoing fees and renew registration regularly
• May need a business license depending on your state

If you’re generating revenue consistently, an LLC gives you both asset protection and more control over how you pay taxes.

What Is the Difference Between Sole Proprietor and LLC?

When deciding between a sole proprietorship and an LLC, it’s important to consider the legal and financial implications of each structure.

Here’s how the two popular business structures stack up:

Category	Sole Proprietor	LLC (Limited Liability Company)
Legal Status	Not a legal entity	Legal entity formed through the state
Liability	Personally liable	Offers liability protections
Taxes	Reported on personal tax return (Form 1040)	Default pass through taxation; can elect S-corp
Cost to Start	Low to none	Filing fees ($50-$500+)
Privacy	Uses your legal name unless you file a DBA	Can use a separate business name
Risk Level	Best for low risk businesses	Better for higher risk businesses
Control	Full control as the sole owner	Also full control if single member LLC
Compliance	Few or no legal documents required	Must follow state rules and file annual reports

Liability Protection

Liability protection is a critical aspect of any business structure. As a sole proprietor, you are personally liable for any business debts or obligations, which means your assets are at risk. On the other hand, an LLC provides limited liability protection, which means your assets are generally protected in case the business is sued or incurs debt. This is especially important for small business owners who have significant personal assets, such as a home or savings, that they want to protect. By forming an LLC, you can separate your personal and business assets, reducing your personal liability and protecting your personal assets from business debts.

How Business Structure Affects Your Taxes

This part matters the most for OnlyFans creators.

As a Sole Proprietor:

• All business income is reported on your personal income tax returns
• You pay self employment taxes on all your profits
• You can deduct business expenses like internet, camera gear, and makeup

As an LLC:

• By default, taxes work the same as a sole proprietorship (pass-through)
• You can choose S-corp status to potentially save on payroll taxes
• You still file a personal tax return, but you may also need additional tax forms
• Must meet specific tax obligations, including filing additional tax forms if electing S-corp status

Both are pass-through entities, which means profits are taxed on your personal return, not the business itself.

What Happens If You Do Nothing?

Doing nothing means you stay a sole proprietor by default. That’s fine when you’re earning a small amount. But as your income grows, your risks grow too.

If your content business is hit with a lawsuit or fails to pay taxes, your personal assets are exposed. That includes your home, car, savings, or anything in your name. In addition to personal liability, you may also face other business obligations that can complicate your financial situation.

Forming an LLC doesn’t make your tax work go away, but it creates a layer of legal protection. It helps keep your business obligations separate from your personal ones.

Real-Life Example: $3K vs. $30K Per Month

Let’s say Creator A makes $3,000 per month on OnlyFans. Creator B makes $30,000.

Creator A:

• Likely fine as a sole proprietor
• Pays income tax and self-employment taxes
• Pays income taxes on all earnings
• Writes off studio setup, phone bill, and subscriptions

Creator B:

• Likely needs an LLC (or S-corp) to reduce risk
• Pays themselves a salary and takes the rest as distributions (if S-corp)
• Could save thousands in tax benefits while protecting business assets

The more you earn, the more important it is to separate your personal life from your business.

How to Pay Taxes as a Sole Proprietor vs. LLC

No matter your structure, you have to pay taxes. Here’s what it looks like:

You may also need an Employer Identification Number (EIN) for tax filing and compliance purposes.

As a Sole Proprietor:

• Report your net income on your personal return
• File Schedule C with Form 1040
• Pay state income tax if required

As an LLC:

• Same process unless you elect S-corp taxation
• If taxed as an S-corp, file Form 1120S
• Issue a W-2 to yourself and pay payroll taxes

Many small business owners stick with default LLC tax rules unless their profits are high enough to benefit from the S-corp structure.

Business Expenses and Deductions

As a business owner, you’ll need to understand how to handle business expenses and deductions. Both sole proprietorships and LLCs can deduct business expenses on their tax forms, which can help reduce their tax liability. However, LLCs may have more flexibility in terms of tax deductions, as they can choose to be taxed as a pass-through entity or as a corporation. Additionally, LLCs may be able to deduct certain expenses that sole proprietorships cannot, such as health insurance premiums and retirement plan contributions. By understanding how to handle business expenses and deductions, you can minimize your tax liability and maximize your profits.

FAQs

Do I need to pay taxes if I make less than $600?

Yes. Even if you don’t get a 1099, the IRS still expects you to report all business income. Many creators don’t realize that income from platforms like OnlyFans, even in small amounts, is still taxable. Staying compliant helps you avoid penalties and interest later.

Do I need a business license for OnlyFans?

Maybe. Some states and cities require a license for any unincorporated business. Always check with your local government to be safe. Having a business license may also help you open business bank accounts or qualify for deductions more easily.

Can I write off expenses like lingerie and lighting?

Yes, if they are ordinary and necessary business expenses. Keep your receipts and note how each item supports your content creation. Clear records will help you defend those deductions if you’re ever audited.

Can I start as a sole proprietor and switch later?

Absolutely. Many business owners do that once their income or risk increases. It’s a common path. Just be sure to close out old tax details correctly and register your LLC when you’re ready to upgrade. In some jurisdictions, you may also need to announce your intention to create an LLC in a local newspaper as part of the legal requirements.

Conclusion

Choosing the right business structure is one of the most important decisions you’ll make as an OnlyFans creator. While starting as a sole proprietor is simple and cost-effective, it comes with certain risks, especially once you begin making more money or working with outside partners. A sole proprietorship can be a solid short-term option, but it doesn’t offer the long-term protection many creators eventually need. An LLC, on the other hand, adds professionalism and legal protection. It creates a line between your business and personal life.

At The OnlyFans Accountant, we help creators understand whether a sole proprietorship or an LLC is the right move for their business, income level, and long-term goals. Choosing the right structure gives you more protection, better tax planning options, and the foundation you need to grow safely as your earnings increase. Contact us today if you want expert guidance on setting up your business the right way and making sure your taxes and finances are structured for real, sustainable success.