A sole proprietorship is not a separate legal entity. The business and owner are not treated as independent. The sole proprietor pays taxes on all profits from the company and can claim allowable losses if the company loses money. The sole proprietor is also 100% liable if there's an issue with the business such as unpaid debt or a lawsuit. An LLC, on the other hand, creates a separate legal entity for the company. The separate entity can provide liability protection for owners. LLCs are pass-through businesses, though, which means profits and losses are still declared on the owner's tax returns.