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Starting a Business: Sole Proprietorship vs LLC

As an entrepreneur, you’ve probably thought about starting a business and are aware of the many options available. One of the most common choices for small businesses is to be set up as either a sole proprietorship or a limited liability company (LLC). We take a look at the highs and lows of each option.

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Making the first decision between Sole Proprietorship vs LLC

Choosing which entity type to start is a crucial decision to make right from the start. However, there’s not always a clear answer for which best suits your needs. We’ll address the differences between LLCs and sole proprietorships and what to consider when deciding which one best fits your situation.

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Remember the little things

Before even picking what type of business you’re going to start, don’t forget about the little extras that are needed to do things right from the start.

  1. Getting a virtual mailbox and/or business address: This ensures that you have a professional looking address registered to a business zoned location. Many vendors and service providers look more favorably on businesses that are not legally home based. We recommend Incfile for this service as an affordable option.
  2. Get a business bank account: No matter which entity type you choose, you’re going to need some reliable, tech friendly business banking. Many physical banks have a lot of fees or are a bit antiquated in how they handle modern businesses. We highly recommend you check out Relay Financial or Novo as your business bank for your new business. Read our review of Relay right here.
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What is a Sole Proprietorship?

A sole proprietorship is a business owned and managed by one person, with no distinction between the owner and the business. This means that the business owner uses their personal assets to fund it and accepts full responsibility for all debts, liabilities, and obligations of the business. A sole proprietor has no official liability protection but can also be used to shield assets from personal creditors.

The business doesn’t have to file taxes separately because it exists under the owner’s name. The best thing is that sole proprietorships are also simple to close since no major formalities are involved in dissolving a sole proprietorship.

What is an LLC (Limited Liability Company)?

A limited liability corporation (LLC) is a legal entity founded by state statute. An LLC is much like a corporation because it provides its members with limited liability for their personal debts and obligations. In an LLC, however, the owners have more flexibility than they would have in a corporation and can make certain tax-related and financial decisions without consulting other shareholders.

Starting an LLC provides more flexibility than a sole proprietorship regarding taxation, liability protection, and capital-raising options. It also protects your assets against lawsuits related to your business operations. If someone sues your company and wins, they can’t go after your personal assets like bank accounts or property. However, an LLC also means you have more paperwork than a sole proprietorship because you must file Articles of Organization with the state where you’re located before conducting any business activity under this type of structure.

Services like Incfile make this process extremely easy and affordable, from steps like registering your EIN, to

Differences Between Sole Proprietorship And Limited Liability Company (LLC)

The difference between a sole proprietorship and limited liability corporation (LLC) is one of the most hotly contested subjects among business owners, entrepreneurs, consultants, and accountants globally. Here are factors to consider while deciding whether to form a limited liability corporation or a sole proprietorship.
Formation

In an LLC, the owners are called members, whereas, in a sole proprietorship, only one owner holds all the rights to do business under their name. A single-member LLC is similar to a sole proprietorship, as only one member exists. That person controls all aspects of the business, including liability issues.

The main difference between an LLC incorporation and sole proprietorships is that an LLC is a separate legal entity with its tax ID number. In other words, when you form an LLC, you create a new business entity separate from your personal assets. If you’re the sole LLC owner, any liability from your business will be limited to the company’s assets. This means creditors can’t come after your personal possessions like your home or car if something goes wrong with your enterprise.

Management and Operations

The sole proprietorship is owned by one person who also runs it. The owner receives all profits and takes on all responsibilities for the business. A limited liability company (LLC) is more complex than a sole proprietorship. An LLC’s operational and managerial structure is more complicated and often specified in an LLC operating agreement. LLCs with several members are more likely to have operating agreements, even though just a few states mandate them. Ownership interest, voting rights, and profit sharing are all defined in the operating agreement. The members of an LLC can cooperatively administer the company, or they can choose management to do so.

Registered Agent

A registered agent is a person or business that agrees to receive legal documents on behalf of your LLC. The registered agent must have a physical address in the state where your LLC is formed. You will list the registered agent’s name and address when you file your Articles of Organization with the state. The registered agent can be an individual, such as yourself, or it can be a business, such as a law firm. Get one year of free registered agent services from our friends at Incfile.

Taxes

One of the biggest differences between an LLC and a sole proprietorship is taxes. Although both entities are taxed as pass-through entities — meaning they don’t pay corporate income tax — they have different tax treatments. A sole proprietor files taxes as an individual, while an LLC is treated as a separate entity from its owner for tax purposes. This means that you will pay self-employment taxes on your share of any profits at the end of the year.

LLCs and single proprietorships may have extra tax obligations and income tax obligations. If you have employees, you’ll have to pay payroll taxes, no matter what business structure you choose. You must also collect local and state sales taxes to sell taxable products or services. Limited liability companies are also subject to extra taxes in a few states and municipal governments. Additionally, you’ll be responsible for local and state income taxes and payroll taxes.

If you’re interested in learning more about LLC Taxes, check out the Taxpayer’s Comprehensive Guide to LLCs and S Corps from our trusted partner.

The sole proprietor owns the business and can be held personally liable for any debts or claims made against the business. There are no corporate formalities or compliance requirements, but you must have insurance coverage to protect yourself from liability. You’re responsible for all aspects of the business, including finances, taxes, liabilities, and legal disputes. Your personal assets are at risk when the business fails because there’s no distinction between your personal and business assets.

When you form an LLC, your personal assets are protected from any debts or obligations incurred by your business. That means it protects members against personal liability. This makes it easier to attract investors who want to share profits without worrying that they’ll be on the hook if something goes wrong with the business. The members can also decide how much each member gets paid from profits according to their capital contributions.

If your LLC firm fails or loses money, creditors can’t go after your personal assets. However, if there is more than one owner in an LLC and one person decides to leave the company without paying their share of debts and obligations, those debts will likely be passed on to other company members responsible for paying them off.

Paperwork

Starting a sole proprietorship requires minimal paperwork. After launching, a sole proprietor is exclusively responsible for federal, state, and local tax obligations. A sole proprietor may have to renew their company licenses.

A limited liability company (LLC) is subject to increased regulatory oversight. In many states, LLCs must provide an annual report after filing their original articles of formation. Multi-member LLCs have more duties, such as establishing a bylaws agreement, distributing membership units, documenting ownership transfers, and having member meetings.

LLC Vs. Sole Proprietorship: How to Decide on Business Type

The LLC and sole proprietorship are two of the most common business structures for small businesses. But which is best for your company? You need to consider several factors, including your goals, resources, and financial situation, which will help you know how to create an LLC.

If you’re just starting, the sole proprietorship may be the way to go because it’s relatively easy to set up and maintain. However, as your business grows and becomes more complex, you may want to consider switching to an LLC or other type of business entity.

Conclusion

Now that you’ve seen the benefits of sole proprietorship and LLCs, it’s time to decide. Your choice should be based on your business needs and personal preferences. If you want to keep things simple by operating under one name, then an LLC may not be right for you. However, if you want more protection from creditors or lawsuits against your business and don’t mind filling out extra paperwork each year when filing taxes, then an LLC might fit perfectly into your budget!

Get started today for free with our friends at Incfile. They’ll make the whole process easy, fast and affordable so you can focus on getting your new business off the ground quickly!

To learn more, take a look at some of our other guides and favorite business services here.

Mitch R.
Mitch R.https://www.nerdsimple.com
Mitch was a nerd at birth. He took up console gaming in the Atari days and PC gaming in 1990. By day he works as a Solutions Architect for a major telecom company and does ASP.NET Core/Blazor/C# as side gig. Does the man ever sleep? No. He doesn't. Coffee is life.
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