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LLC vs. Sole Proprietorship: Everything You Need to Know

Finding the perfect business entity structure for a small business owner is one of the most important but potentially confusing decisions you will make. New business owners are often confused about the dissimilarity between a limited liability company (LLC) and a sole proprietorship. This article will help you learn about the difference between an LLC and a sole proprietorship, the benefits of forming an LLC, why it is advisable to form an LLC, and which one you should choose for your business. Keep reading for adequate information to help you decide which entity structure better suits your needs.  

LLC vs. Sole Proprietorship

LLC vs Sole Proprietorship 

Before we study the many facets which support all the factors comparing an LLC vs. a Sole Proprietorship, you must understand what they are.  

What is an LLC?

An LLC is an independent business entity that is constructed under state law. An LLC merges the components of a sole proprietorship, partnership, and corporation, and offers owners a great deal of adaptability. The owners of an LLC can govern their management structure, operational process, and tax treatment. One individual can shape a solitary-part LLC, or numerous individuals can construct a multi-part LLC.

You can identify a business as an LLC because its lawful name will end with the phrase “limited liability company” or the abbreviation “LLC”. The defining element of an LLC is offering its member liability protection from debts, obligations, and commitments of the business. In the typical course of business, a business bank or somebody who sues the business can’t come after the owner’s personal assets.

What is Sole Proprietorship?

A sole proprietorship or ownership is an unincorporated business with one owner and is the easiest and most economical kind of business to form. A person who works a business alone is the sole owner. For instance, if you work as a retailer, are independent, maintain a web-based business, or sell labor and products, you’re a sole owner unless you’ve taken on another business structure.

You can distinguish a business as sole ownership because the owner’s name is the business’ name. However, sole proprietorships can also work under a brand name or a business trademark. The fundamental trait of sole ownership is that there’s no lawful partition between the business and the business owner. The owner is personally responsible for the business’s debts, which is not the case for an LLC. 

Difference Between an LLC and a Sole Proprietorship

The main distinction between a sole proprietorship and an LLC is that an LLC will save your assets if your business is sued or suffers from a loss. Entrepreneurs and serious business owners will often choose to form an LLC over a sole proprietorship. The type of business you offer can help determine which entity structure you should choose. For example, a sole proprietorship will suffice if you offer a construction or handyman service. However, if your business provides consulting services, it may be more valuable to protect yourself by removing liability with an LLC. 

Below are the prime characteristics one should compare when deciding between a sole proprietorship and an LLC.

  • Personal Liability Protection – The foremost detail on the list is personal liability protection. Personal liability protection is not an option with a sole proprietorship. With a sole proprietorship, the personal assets of the business owner such as their car, house, bank account, etc., are at risk. In any case, if the business is sued or if it defaults on debt, all the assets of the owner will be affected. On the other hand, an LLC will provide complete asset protection. This means that all of the owner’s personal assets, such as their car, house, and bank account, are safeguarded in case your business is ever sued or if it defaults on a debt. An LLC  protects your assets and prevents you from going broke. 
  • Taxes – A critical contrast between LLCs and sole ownerships is tax flexibility. Only LLC owners can pick how their business will be taxed. In other words, they can customize their tax structure. They have the option to choose the default pass-through taxation or they can choose for the LLC to be taxed as an S-corporation or C-corporation. An S-corporation is a pass-through entity. If taxed as a C-corporation, the LLC will pay a corporate personal tax at the federal level. Many states also levy corporate taxes. LLCs can save cash by choosing corporate tax status. When an organization is taxed as an enterprise, profits from the business are generally charged at a lower rate than the standard business income. Furthermore, retained earnings in an organization aren’t dependent upon income tax. On the other hand, a sole proprietorship is an entirely different case. They pay their taxes on their profits and also pay complete FICA taxes, including the Medicaid, and Social Security taxes. In the case of Sole proprietors, the moment your business becomes profitable, taxes will get expensive.
  • Formation – You may be amazed to discover that you don’t have to do anything explicitly to form a sole proprietorship. You may be working as a sole proprietorship without knowing it. Any individual selling goods and services without a partner is a sole owner or proprietor. You will have to apply for permits conditional to where your business is located to operate or draft licenses to work legally. Any business that works under a trade name, including a sole ownership, must apply for a fictitious business name certificate, otherwise called a DBA or “doing business as” certificate. After everything, that is all as far as the formation paperwork goes, making sole proprietorships the most straightforward and economical type of business to start. However, an LLC could likewise have to file for licenses to operate and a DBA. To form an LLC, the main formation document necessary is known as the articles of organization. This document lays out your LLCs presence and should be filed with the state where your business is located. The cost to record articles of organization differs from state to state. However, it generally runs between $50 to $200.
  • Management Structure – The management structure of a sole proprietorship is simple because there’s just one person at the top. The company owner can make all business decisions without input from any third party. Many sole proprietors choose to hire employees, accounting and legal experts, as well as other people to help with the day-to-day management of the business. A sole proprietor’s main objective is to make sure that their business is operating safely, and legally, and that the business is making enough profit to cover business debts. The management structure of an LLC is more complex and outlined in an LLC operating agreement. Though only a few states demand an operating agreement, most LLCs have one, particularly those with multiple members. The operating agreement outlines each member’s ownership stake in the business, voting rights, and profit share. The members or an appointed manager can collectively manage an LLC.

Which one is best for your business?

Choosing a business type can be difficult. A large number of budding entrepreneurs tend to be more inclined towards a Sole proprietorship. This is usually because of the simple and minimal required work. An LLC additionally can be complex but offers much more flexibility than a sole proprietorship. 

Choosing the best business structure for your dream business will closely rely on many factors. It’s best to consult a business lawyer before making this critical decision. However, due to an amalgamation of liability protection and tax flexibility, an LLC is often a fantastic fit for a small business owner.

Need expert assistance in forming your business?

The bottom line is forming a business can be too risky, and you might need an expert’s advice on the various aspects of forming your business. Now that you are ready to form an LLC or any business, you can opt for an expert to guarantee a smooth process. IncParadise can help you form your LLC in your desired state. We also offer many other services that will ease a lot of the tension on your shoulders. To learn more, contact us now!

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