You are just testing the waters. You sold $5,000 on Amazon last month. You don’t want to spend money on lawyers. But the debate of Sole Proprietorship vs LLC is the most important decision for your financial safety in 2026.
“I’ll just stay as a Sole Proprietor,” you say. “It’s simpler.”
In 2024, that might have been true. But in 2026, with the new One Big Beautiful Bill Act (OBBBA) and aggressive lawsuits against Amazon sellers, operating as a Sole Proprietorship is like driving a car without insurance.
Here is the honest, no-fluff guide to Sole Proprietorship vs LLC for e-commerce sellers. We will analyze the liability risks, the tax realities (no, an LLC doesn’t automatically save you money), and why the new federal laws make forming an LLC a “no-brainer” this year.
The Liability Myth: “They Can’t Take My House, Right?”
This is the most dangerous misconception.
As a Sole Proprietor, legally, you are the business.
- If you sell a toy that hurts a child… YOU hurt the child.
- If you sell a supplement that makes someone sick… YOU made them sick.
- If your dropshipping supplier violates a trademark… YOU violated it.
In a lawsuit, the judge does not see “My Amazon Store.” They see John Doe.
This means they can seize your personal bank account, your car, and even your house to pay the debt.
Enter the “Corporate Veil” (LLC)
A Limited Liability Company (LLC) creates a magical barrier called the “Corporate Veil.”
If your LLC gets sued, they can only take the assets inside the company (your inventory, business cash). Your personal house and retirement savings are generally safe (unless you commit fraud or mix funds).
Warning for 2026: “Strict Liability” is now the standard. Courts are ruling that every seller in the chain is responsible. You cannot blame the manufacturer in China. You need the shield.
The Tax Reality: Don’t Believe the Hype
The tax difference in the Sole Proprietorship vs LLC comparison is often misunderstood by new sellers.
“Open an LLC to write off your lifestyle!” ❌ WRONG.
For federal tax purposes, a Single-Member LLC is treated as a “Disregarded Entity.“
- Sole Proprietorship vs LLC paperwork burden? Now it’s almost equal thanks to the OBBBA exemptions.
- Single-Member LLC: You file… exactly the same Schedule C with your personal 1040 return.
The Truth: An LLC by itself does not save you a single penny in federal taxes. You pay the same Self-Employment Tax (15.3%) and Income Tax.
The “S-Corp” Secret Weapon
So why do rich sellers have LLCs? Because an LLC gives you the option to elect S-Corp Status later.
- Once you make $60,000+ in profit, an S-Corp election allows you to split your income into “Salary” and “Dividends,” potentially saving $5,000+ per year in taxes.
- Sole Proprietors cannot do this. You must have an LLC first.
2026 Update: The OBBBA & The Death of “BOI” Reporting
This is the biggest news of the year.
Under the Corporate Transparency Act (CTA) of 2024, LLC owners had to file invasive “Beneficial Ownership Information” (BOI) reports with the federal government (FinCEN). It was a privacy nightmare.
Good News: The OBBBA and Executive Order 14192 have EXEMPTED domestic US entities from this requirement in 2026.
- Sole Proprietorship vs LLC paperwork burden? Now it’s almost equal. The main deterrent to forming an LLC (federal red tape) is gone.
Privacy & Anonymity: Hiding Your Home Address
Do you really want your home address visible on your Amazon “Seller Profile” for every angry customer to see?
- Sole Proprietor: You usually have to use your home address.
- LLC: You can form an Anonymous LLC in states like Wyoming, Delaware, or New Mexico.
By using a “Registered Agent” in these states, the public sees the agent’s address, not yours. Your privacy is protected.
Amazon Verification & The “Section 3” Factor
Amazon’s AI hates ambiguity.
- Sole Proprietorship: Verification is harder. You upload a utility bill. The name on the bill must match your Seller Central name exactly (e.g., “John Smith”). If your bill says “J. Smith,” you get suspended.
- LLC: You have a distinct EIN (Employer Identification Number) and “Articles of Organization.” This makes you look like a professional entity. Passing “Section 3” verification and “Video Identity” checks is smoother because your documents are standardized.
Cost vs Benefit: When Should You Switch?
Here is a quick breakdown of the Sole Proprietorship vs LLC features to help you decide:
| Feature | Sole Proprietorship | LLC (Single Member) |
| Setup Cost | $0 | $50 – $800 (State Dependent) |
| Liability Protection | ❌ None | ✅ Limited Liability |
| Tax Returns | Schedule C (Easy) | Schedule C (Easy) |
| Credibility | Low | High |
| Privacy | Low (Home Address) | High (Registered Agent) |
The “California” Warning 🐻
If you live in California, watch out. The state charges an $800 annual franchise tax for every LLC, even if you make $0 profit.
- Strategy: If you are in CA and making less than $5,000/year, stay as a Sole Prop a bit longer. Once you have assets to protect, pay the $800. It’s cheaper than a lawsuit.
Summary: Do You Really Need One?
- Stay a Sole Proprietor IF: You are just testing a hobby, making <$2,000 profit, and selling low-risk items (books, stickers).
- Form an LLC IMMEDIATELY IF: You are selling products that go in or on the human body (supplements, cosmetics, baby toys), OR you are making >$10,000 profit.
Making the final choice on Sole Proprietorship vs LLC depends on your risk tolerance and profit margins. If you are already selling, make sure you have your Amazon FBA Resale Certificate set up to avoid double taxation.