Starting a business is a life-changing decision and the first and most important step is choosing an entity structure. LLCs and Sole Proprietorships are the most popular.
What’s the difference between a sole proprietorship and an LLC? We’ll break it down for you, so you can make an educated decision.
Sole Proprietorship vs LLC
Choosing between an LLC or sole proprietorship can be difficult. This is because both of these entities come with different pros and cons that can spell success or failure depending on your business. So, don’t rush to decide. Make sure you understand the differences. That way you set your business up for success. Now, let’s breakdown the differences!
Recommended by accountants and attorneys for its simplicity, sole proprietorships are the quickest way to start a business. But with simplicity comes risks.
With no legal distinction between yourself and your business, business liabilities become personal liabilities. If sued, judgment can come against your personal assets meaning you risk losing everything for your business. It’s also difficult to raise capital as a sole proprietor since it relies on you qualifying for a personal loan.
Lastly, sole proprietorships limit your ability to participate in things like federally qualified pension plans and medical reimbursement plans which are available to other business entities.
Overall, sole proprietorships are risky entities, and as such, are not a good long-term business solution.
In today’s ‘lawsuit-happy’ environment, it’s more important than ever to place a legal shield between you and your business. As a separate entity, LLCs do just that. There’s no personal liability for any LLC debts even if they relate to a contract or tort.
LLC’s are also easy to run and manage with no limitations as to how many members can be involved or where they’re located. Formed on the principle of the Freedom to Contract, owners need only agree among themselves on how to run the company, and courts will uphold that agreement.
Even better, with an LLC, there’s no law requiring resolutions, amendments, meeting minutes or annual board meetings.
Sole Proprietorship vs Single Member LLC
Can a sole proprietorship be an LLC? The answer to that question is simple…No. A limited liability company (LLC) cannot be a sole proprietor. Entrepreneurs often ask this question assuming that more than one person has to operate an LLC. But an individual can do business as an LLC. If you are a sole proprietor, you own and operate your own business, but it is not a corporation.
A limited liability company is a business structure that is not a corporation and not a sole proprietorship.
LLC vs Sole Proprietorship: Taxes
Still asking yourself, “Should I get a sole proprietorship or an LLC?” The differences in how each structure files taxes might help make the decision easier.
While legally separating businesses from the owner, LLCs can elect treatment as a partnership for tax purposes. As such, the LLC doesn’t pay any tax itself.
Instead, the income passes through to the owners like with partnerships thanks to the tax rules governing partnerships that aren’t as rigid, allowing more flexibility in tax planning.
From a tax standpoint, a sole proprietorship is the easiest structure to set up. This is because as a sole proprietor you don’t have to file a separate business tax return.
Instead, you simply attach a Schedule C to your 1040 and file it with the IRS. Gains, losses, and other taxable items from your business are all combined.
LLC versus Sole Proprietorship: How to Form Each Business Type
Starting a Sole Proprietorship
What makes sole proprietorships such a tempting business type is that they’re the only business that doesn’t have to register with a state. All other business types must file a registration form with each state in which they do business.
To start a sole proprietorship, all you need to do is:
- -Create a business name and decide on a location for your business
- -File for a business license with your city or county
- -Set up a business checking account so you don’t mix up business and personal spending.
Starting an LLC
Forming an LLC requires a bit more work. For starters, you’ll have to file something called articles of organization (or certificate of organization) with the state.
You should also expect to file certain forms with your state agency, usually the Secretary of State, and pay an initial filing fee that can range from $50 to $500. LLCs also have to file annual or periodic reports and pay a required filing fee in most states.
To avoid missing important documents and failing to pay all the applicable fees, most entrepreneurs hire business startup companies like Inc Authority to file their business for them.
We’ll do all the legwork for you so you start your business the right way and can focus on other aspects of your business. Contact us to learn more and get started!
So, in a nutshell, what is the difference between a sole proprietorship and an LLC? Sole proprietorships are easy to form but don’t provide liability or asset protection. LLCs take a bit more legwork but protect you from lawsuits and debt incurred, and as such, is the smartest choice.
The experts at Inc Authority will form your LLC for you in minutes, and make sure you have everything needed to run your business in your state.
Not to mention we offer a ton of free management tools to help make running your business as simple as possible. Contact us today to get started!
Incorporating is the most powerful thing you can do to legitimize your business. And at IncAuthority.com, our LLC setup service is 100% free. Always. So, don’t wait. Form your LLC today and enjoy the protection due to you and your business under the law. Start now for free