Sole Proprietorships Vs Llcs: Pros And Cons Plus Which One Is Best For You
If you’re looking to start your own business, I’m willing to guess you’ve already heard this question at least a handful of times: “Are you going to become an LLC, or stay a sole proprietor?”
To understand the difference between an LLC and a sole proprietorship, let’s start with an example.
Let’s say I recently started selling hand-carved wooden picture frames. I’m selling them online on Etsy, Facebook, and a few other sites, and I’m doing pretty well making roughly $5,000 per year.
Of course, this isn’t my full-time job. It’s a side business . I do it because I enjoy it, and I make roughly enough money for an extra vacation each year.
Right now, I am a sole proprietor. That’s how easy it is to become one no paperwork or special tax filing necessary.
However, there are limitations to a sole proprietorship. For one, I am liable to lawsuits, and if someone chooses to sue me, my personal assets are at stake. Similarly, if my business is in debt, creditors can go after my home, car, or other personal property.
All of which is to say, if my business grows and becomes a full-time hustle, I might want to reconsider the risks I’m willing to take by filing paperwork to become an LLC, instead.
If you’re reading this, you might be at a similar crossroads where you’re unsure which business entity structure is right for you. Here, let’s dive into the full advantages and disadvantages of an LLC versus sole proprietorship, so you can make the best choice for you and your business.
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- With a sole proprietorship, all a business owner has to do is hang a shingle on the door and run the company under the proper rules and regulations of local governing bodies In general, though, it costs very little – even nothing – to file as a sole proprietorship.
- With a limited liability company, the paperwork starts to pile up. First, you must form your company and register it with the proper authorities
You’ll need to complete and file articles of incorporation, which spell out exactly how the business will be run and who’ll be making the decisions. You’ll also need to pay a filing fee of $100 or more and file it with your state’s secretary of state’s office. In all, expect to pay about $1,000 or so to properly file your business as an LLC.
Filing a company as a sole proprietorship is much easier and less expensive than filing as an LLC. With the latter, you’re paying more upfront cash, filling our more paperwork, and takes up way more time than with a sole proprietorship.
What Is The Difference Between A Sole Proprietorship And A Corporation
Sole proprietorships are an informal business structure that offers no tax benefits or personal liability protection but allows more flexibility and freedom for business owners.
Comparatively, corporations are formal legal business structures that offer personal liability protection, tax benefits, and investor opportunities but are complicated to maintain.
Highlights Of The Two Business Structures
Heres an at-a-glance run-down of some highlights to compare a sole proprietorship vs. LLC business structure:
- Sole proprietorships are generally less expensive to establish and easier to maintain administratively.
- In a sole proprietorship, owners are taxed at the applicable individual income tax rates on profits that the business makes.
- LLCs shield their owners legally, providing a level of personal liability protection against debts of the business.
- LLCs must complete formation documents, register with the state, and pay a filing fee.
- LLCs must follow their states laws that govern the LLC entity type. They may need to pay annual fees, file annual reports, and hold annual meetings.
- LLCs must keep their company records and funds separated from those of their owners.
- LLCs have tax flexibilitythey may choose to be taxed as a sole proprietorship , C Corporation, or S Corporation.
As you can see, there are potential pros and cons to each business structure. Which will be the best option for you will depend on your specific circumstances and objectives.
What Are The Pros And Cons Of Sole Proprietorship Vs Llc
There are many pros and cons of sole proprietorship vs. LLC. But before choosing which type of business to form, you should know what each one is.
An LLC, or limited liability company, operates as a hybrid of the partnership and corporate business structures, particularly due to the limited liability protection it offers and pass-through taxation benefits. The LLC is a separate and distinct entity from its owners. It can operate as either a manager-managed or member-managed LLC. This means the members of the LLC will manage the business. However, the members might choose to hire a manager to oversee the business operations.
A sole proprietorship is the simplest type of business to create. It involves only one member who creates the business and reports all profits and losses on his or her own personal income tax return. Generally, a sole proprietorship doesnt have any employees. There isnt any formal action needed to form your sole proprietorship. For example, someone who offers resume review services is considered a sole proprietor.
While there are advantages to both types of business structures, some businesses would be better off creating one type of business over the other, depending on the number of owners, objectives, and overall goals for the business.
Llc Vs S Corporation: An Overview
Choosing the right business structure is crucial to the success of your business.
An LLC is a limited liability company, which is a type of legal entity that can be used when forming a business. An LLC offers a more formal business structure than a sole proprietorship or partnership. It also offers protection to the owner from personal liability for any of the debts that a business incurs. In other words, the personal assets of the owner can not be used for legal claims against the business. LLCs are common because they provide the liability that’s similar to a corporation, but they are easier to establish.
While LLCs and S corporations two terms are often discussed side-by-side, they actually refer to different aspects of a business. An LLC is a type of business entity, while an S corporation is a tax classification. It lets the Internal Revenue Service know that your business should be taxed as a partnership. To become an S-corporation, your business first must register as a C corporation or an LLC. A business must meet specific guidelines by the Internal Revenue Service in order to qualify as an S corporation.
An S corporation provides limited liability protection but also offers corporations with 100 shareholders or fewer to be taxed as a partnership. An S corporation is also known as an S subchapter. In some instances, a business may be both an LLC and an S-corporation.
What Is An S Corporation
An S corporation simply got its name from Subchapter S of the IRS code. It is a type of corporation that protects its shareholders from personal liability in the event that the corporation engages in some sort of misconduct. Unlike an LLC, however, an S corporation provides certain tax advantages that an LLC does not. For instance, LLC members are required to pay taxes on the businesss entire net income. Shareholders of an S corporation are only required to pay income tax on their share of wages.
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Registering The Business Name
Sole Proprietorship In a sole proprietorship, the business owner IS the business. If the business will operate under a name other than the owners legal name, the owner must file a Doing Business As . For example, if John Wilcox operates his business as John Wilcox Plumbing and Heating, he will not need to do a fictitious name filing. If, however, he wants to call his business, West End Plumbing and Heating, he will need to submit the fictitious name to the state for approval. Some states also require advertisements or notices be run in a local or legal newspaper to disclose to the public who is operating the business under the DBA.
Limited Liability Company When registering an LLC, the business name is automatically registered when formation documents are filed. In some states, its possible to reserve a name in advance of formally registering the business. Name reservations expire after a certain amount of time if not renewed or if business registration isnt completed. Most states require an LLC to include the designation of LLC,Limited Liability Co.,Limited Liability Co. or some other identifier after its name.
When Should A Sole Proprietor Become An Llc
The decision is ultimately yours. But keep in mind that as a new business, legal protection can be important to your well-being and the longevity of your endeavor. Forming an LLC early on can help protect you personally from business liability. It can also make your business appear more stable to lenders and vendors, as well as customers and business partners. In that sense, it can be an investment in your success.
Running a sole prop is as simple as getting to work and tracking your income and keeping it separate. You are the owner and the business, so all decisions are yours to make. That makes it easy to get started, but as your business grows you take on more risk.
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Llc Or Sole Proprietorship Which Is Best For Your Kentucky Business
Business is booming in Kentucky. The U.S. Small Business Association reports that small businesses represent 96.7 percent of employers in the state and employ 47.8 percent of those working in the private sector. The Region 4 Regional Administrator of the SBA, who covers Kentucky along with Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee, reports Kentucky has over 339,700 small businesses or self employed individuals.
Considering starting a small business in Kentucky?
Entrepreneurs move forward with a business for a variety of reasons. Some enjoy the flexibility of setting ones own schedule and the independence to pursue the full range of ones professional strengths as well as potential tax advantages.
Starting a small business comes with risks, but those risks can be mitigated with careful planning. Part of this planning process involves determining the best way to incorporate a business. Those considering starting a small business in Kentucky are likely considering establishing the business as either asole proprietorship or an LLC .
What is the difference between a sole proprietorship and an LLC?
It is important to carefully review the various business formations that are available before moving forward with a designation. The choice will impact liability protection as well as how the business is taxed. Here are some key differences between a sole proprietorship and an LLC:
What is the benefit of an attorney?
Costs In The Sole Proprietorship Vs Llc Discussion
Its really easy to say that you need an LLC. However, in some states an LLC can be very expensive to set up and maintain. Do not fall victim to the sharks that are trying to get you to do your LLC in one state or another. Where you should file your LLC is another long discussion, and there are lots of factors to consider. Cost is a factor, but only one factor.
If youre in California, for example, your annual fees are on the order of $800 per year. Yet Arizona has no annual fee. Regardless, you must be registered in the state where you are doing business . So, if you are doing business in California and you or your LLC is a resident of Arizona, youll still have to pay all the fees in California. If you want to avoid the fees, dont do business in California. Please dont be a sucker for the deals to form your business in specific states to avoid fees in anotherthis is a case where if it sounds too good to be true, it definitely is.
If there are high expenses for an LLC and the liabilities are low in your business activities, then just go with a sole proprietorship. Low liability activities include things like reselling garage sale items on eBay, being an artist or a seamstress, working an MLM, or working as a secret shopper. If you have employees, you have liabilities no matter what youre doing, and you need an LLC.
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What Is A Sole Proprietor
A sole proprietor is a fancy term for business owner.
In a sole proprietorship, you and the business are the same. This is someone who more or less is the business they own. While you are not a legal entity, you are legally responsible for your business.
Naturally, there are a lot of benefits to sole proprietorship including:
- You are always in control of business decisions
- You are in control of sales and transfers
- You dont have to deal with corporate tax payments
- It is an inexpensive business entity
- There are very few requirements
- Can be formed instantly and with minimal paperwork
- They do not require state paperwork, ongoing formalities, or a separate tax filing
- You can legally mix business and personal assets
You may have one or more of the above reasons for wanting to start a sole proprietorship. Weigh the pros and cons carefully and feel free to email me at to discuss your unique situation.
Can A Sole Proprietorship Be An Llc
Yes, a sole proprietorship can be an LLC.
You simply file the appropriate paperwork and pay the filing fees to transform your sole proprietorship into an LLC. Once your LLC is formed, you should keep your business and personal finances separate and meet the requirements to stay compliant each year.
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Why Would You Choose An S Corporation
An S corporation provides limited liability protection so that personal assets cannot be taken to satisfy business debts by creditors. S corporations also can help the owner save money on corporate taxes since it allows the owner to report the income that’s passed through the business to the owner to be taxed at the personal income tax rate. If there will be multiple people involved in running the company, an S corp would be better than an LLC since there would be oversight via the board of directors. Also, members can be employees, and an S corp allows the members to receive cash dividends from company profits, which can be a great employee perk.
What Is The Difference Between An Llc And Sole Proprietorship
A Limited Liability Company, or LLC, and a sole proprietorship are both legal entities that can be formed to operate a business. Both structures allow a business owner to legally run their companies, however they each have unique features, advantages, and disadvantages.
The main ways that an LLC differs from a Sole Proprietorship are:
- Liability protection for the business owner
- Ownership structure
- Government regulation
Asole proprietorship is an unincorporated business that is not legally separated from the business owner. There is only one owner, and that owner reports the businesss profits and losses on their individual tax return. The owner is liable for all debt and risk associated with the business.
An LLC on the other hand provides personal liability protection to a business owner because the business is considered a separate entity from the individual owner. LLCs can have multiple owners and have the option to choose how they are taxed. They can opt to be taxed like a sole proprietorship or as a corporation.
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Llc Vs Sole Proprietorship Vs Corporation
Summary: LLCs are the best business structure for the majority of entrepreneurs. Sole Proprietorships offer no protection whatsoever. Corporations are complex and subject to double taxation. See the details below.
Have you ever asked yourself which business structure is the best for you?
A Sole Proprietorship?
A Limited Liability Company ?
Or how about a Corporation?
Move Forward With Your New Business
Incorporating your business makes it official in the eyes of the government. Youll protect your personal assets, build credit and history for your company, and even enjoy lower taxes in some cases. But the best benefits of business incorporation are perhaps intangible. Incorporation transforms your idea into a real, official businessthe rest is up to you.
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Sole Proprietorship Vs Llc Vs Corporation
When you form a business, you have a lot of decisions to make regarding its structure. Do you need to worry about liability? What about taxes? There’s no substitute for asking for advice from a qualified tax professional, but you should still research on your own the structure that might be right for you.