The main legal distinction between a corporation and a sole proprietorship lies in their legal status and liability structure. A corporation is a separate legal entity from its owners (shareholders), meaning it can enter into contracts, sue, be sued, and own property in its name. This separation provides limited liability protection, shielding shareholders' assets from business debts and lawsuits. In contrast, a sole proprietorship has no legal separation from its owner—the business and the individual are considered the same under the law. As a result, the owner bears unlimited personal liability, meaning creditors or legal claims can target personal assets like homes or savings.

Another key difference is formation and compliance. Corporations must be formally registered with the state, adhere to strict regulations (e.g., filing articles of incorporation, holding shareholder meetings), and maintain corporate records. Sole proprietorships, however, require no formal setup (beyond necessary licenses) and have minimal paperwork. Additionally, corporations have perpetual existence, surviving ownership changes, while sole proprietorships dissolve if the owner dies or exits the business. These legal distinctions impact liability, taxation, and operational flexibility, making corporations better for riskier ventures and sole proprietorships simpler for small, low-risk businesses.