Sole Proprietorships And Partnerships
A sole proprietorship is a business with only one owner.
A sole proprietor is self-employed, performs all business operations and assumes all liabilities.
A partnership company is operated by two or more parties.
In a general partnership, partners are responsible for all aspects of the business, including the debts of the partnership.
A limited partnership can have general and limited partners. Generally speaking, there’s a limit on the liability of a limited partner, while the general partner’s liabilities are not limited.
A limited liability partnership is has no general partners and all partners have limited liability.
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Sole Proprietorship Pros And Cons:
The only advantage of a sole proprietorship is that they are easy to form and maintain. As mentioned earlier, unlike an LLC, which requires business owners to form their company with the state and conform with state regulations and guidelines, there is essentially no setup or maintenance work required to form or maintain a sole proprietorship.
Disadvantages:
- No Personal Liability Protection. Your personal assets are at risk in the event your business is sued or if it defaults on a debt.
- No Tax Benefits. Sole proprietors pay taxes on their profits and also pay full FICA taxes . When your business becomes profitable, taxes will be expensive.
- Limited Growth Potential. When a business becomes more profitable, risk increases. When risk and profit increase, so does the need for a legal formal business structure.
- Less Credibility and Branding Opportunities. A sole proprietor must invoice, receive payment, open a bank account, and market with their surname unless their state allows them to register and maintain a doing business as name.
When to Use a Sole Proprietorship
Sole proprietorships are best for small businesses with the following traits:
- They MUST be low-profit and low-risk.
- They have a smaller customer base think family, friends, and neighbors.
- They might start as hobbies like photography, blogging, or video streaming.
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Should I Pay Myself A Salary
Your small business earnings are a reflection of the hard work that you had put in to bring your business to life. Its quite a fascinating experience as a business owner.
However, the challenge that you face is how to pay yourself as a business owner. There are various factors that you should consider while deciding how to pay yourself.
Llc Or Sole Proprietorship: Which Is Best
Its always better to protect your assets when operating a business, but if you dont have the funds to form an LLC, consider starting your business as a sole proprietorship and transitioning to an LLC once it becomes profitable. Doing so allows you to test your business idea just remember to seek guidance from a financial advisor before starting your business to make sure youre properly assessing the risks and planning ahead.
When youre ready to form an LLC, take the next step and begin drafting your LLC operating agreement, which will help you define the scope of your business.
Emily Crowley
Staff Writer
Emily Crowley is a staff writer at Legal Templates. Her background in nonprofit motivates her to improve access to legal advice in underserved groups, especially in areas like business formation…
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What If A Sole Proprietor Has A Low
If I operate as a sole proprietor, I can create liability for myself through my actions. But as soon as I hire other individuals to perform work, those individuals become agents of my business and have the power to create liability for me.
While workers can also create liability for an LLC, the LLC owners personal assets should have significant protection from most claims that arise out of the actions of the LLCs workers. This would not be true in a sole proprietorship.
How Much Does It Cost To Open An Llc
Youll have a few expenses when forming an LLC. First, theres a one-time formation fee, which costs anywhere from about $50 to a few hundred dollars, depending on your state. You may decide to hire a lawyer or online LLC filing service to prepare and file the paperwork for you. The fee for this varies and is separate from your state filing fee. And if you use a registered agent company to act as your registered agent, youll pay anywhere from about $50 to $300 a year for that service.
In many states, youre required to file an annual report and pay an annual fee or tax. This varies by state but, on average, ranges from $10 to $300 per year .
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Llc Vs Sole Proprietorship: Pros And Cons
Choosing the right business structure for your new venture is a crucial decision. Many business owners lean toward two of the most popular optionsLLCs and sole proprietorships.
Each one has its fair share of benefits and drawbacks.
The right one for you and your business will depend on several factors. Youll need to consider things like the tax implications, startup costs, regulations, liability protection, and more.
If youre torn between the two, youve come to the right place. This guide will provide you with an in-depth explanation of LLCs and sole proprietorships. Youll learn more about each ones advantages, potential downsides, and the differences between the two.
Drawbacks Of Sole Proprietorships
A sole prop might not always be the best choice, depending on your business type and goals. Here are some disadvantages compared to LLCs:
- Personal liability. The owner is responsible for all debts or losses incurred by the business, including lawsuits.
- Difficulty raising capital. Banks and investors are generally less likely to provide financial support for sole proprietorships in comparison to LLCs because its a less formal business entity.
- Everything is on you. Without partners or investors, entrepreneurs are on their own when it comes to making business decisions in a sole prop. Owning and running your own business can be isolating at times.
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In Laymans Terms You Mean You Dont Want To Lose Your Personal Finances Or Assets Due To A Business Dispute
Right. If I operate my business as a sole proprietorship and there is a substantial claim against the business, I could lose my house and personal assets. However, assuming that the business is operated through an LLC and that LLC is properly formed and operated, then that LLC provides protection for the business owners home and other assets, even if there is a claim against the business.
Of course, this protection is not free. Whenever you form an entity, there are costs and hassles.
Whenever you form an entity, there are costs and hassles.
Chasalow
LLCs cost money to form, pay yearly fees to the state , and the owners need to follow certain rules to treat the LLC as separate from the owners personal assets.
Still, I think that almost all businesses should form an entity that provides limited liability protection. While it is important to recognize that some individuals are not ready to form an LLC , it is important to distinguish between being too early in the process to form and not wanting to spend the money. Operating a business comes with several costs. If the business cant afford those costs, it might mean painful as it is that the entrepreneur needs to reevaluate the underlying business itself.
Work As An Independent Contractor
An independent contractor is an individual or entity that agrees to undertake work for another entity. The work is undertaken not as an employee but as one who provides services independently.
Typically, an individual is considered an independent contractor where the recipient of services or the payer controls or directs only the result of the work. Such a person does not guide on what work needs to be done and how.
IRS considers professionals providing independent services like doctors, lawyers, etc as independent contractors.
Such professionals working as independent contractors are a part of the gig economy. It is where people earn income by providing work on demand.
Furthermore, the IRS considers independent contractors either as sole proprietors or single-member LLCs. This means that independent contractors are recognized as self-employed by the IRS.
Since you are considered self-employed, you do not receive a salary as an employee. Rather, you set your pay rates and payment schedules.
Accordingly, you are also not subject to pay any self-employment taxes like social security and medicare taxes, unlike employees.
An individual is considered to be a self-employed person if he:
- Carries out trade or business as a sole proprietor or as an independent contractor
- A member of a partnership that undertakes trade or business
- Carries out trade or business for himself
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What Is An Limited Liability Company What Is A Llc Partnership
The limited liability company, or LLC, is the newest type of business form in the United States. The LLC is a unique hybrid: a cross between a partnership and corporation. LLCs have become very popular because they provide the flexibility, informality and tax attributes of a partnership or sole proprietorship, and the limited liability of a corporation.
To form an LLC, one or more people must file articles of organization with their stateâs business filing office. Although not required by all states, it is highly desirable to adopt a written LLC operating agreement laying out how the LLC will be governed. If you donât prepare an operating agreement, the default provisions of your stateâs LLC laws will apply. Operating an LLC is simpler than when you form a corporation. It is not necessary to have officers and directors, board or shareholder meetings, or the other administrative burdens that come with having a corporation.
LLCs are a clear favorite over partnerships because they offer the same tax benefits but also provide limited liability. They are also a serious alternative to corporations, because they are simpler but offer the same limited liability as corporations and have some tax advantages.
How Does The Management Structure Differ
In an LLC, the business can be owned by one or more members. Its members usually manage an LLC, but they can also appoint a manager to handle the day-to-day operation.
The membership of an LLC and the way it will be run are laid out in a legal document known as an operating agreement.
In a sole proprietorship, you are truly the boss and call all the shots. There are no partners or members to deal with.
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What Is A Limited Liability Corporation
A limited liability corporation, better known as an LLC, is a business structure that combines pass-through taxation with the limited liability of a corporation. An LLC is not a corporationit is a legal form of a company that provides protection and limited liability to its owners. Basically, if a corporation and a sole proprietorship had a baby, theyd name it LLC.
Filing Taxes As An Llc
With an LLC, tax filing depends on whether the LLC is a single-member LLC or multi-member LLC.
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Single-member LLC. For tax purposes, single-member LLCs are the same as sole proprietorships. Both are âdisregarded entitiesâ because they report business income and expenses on Schedule C attached to the ownerâs personal income tax return.
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Multi-member LLCs. These companies file the same tax form used by partnerships: Form 1065. After the LLCâs Form 1065 is filed, each LLC member receives a Schedule K-1 that includes their share of the businessâs profit or loss. The member then uses that Schedule K-1 to report their business income or loss on their individual tax return.
Either way, sole proprietors and members of an LLC pay federal and state income taxes and self-employment taxes on the business income with their personal tax return. An LLC can also elect to file as an S corporation for potential tax benefits .
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What’s The Difference Between An Llc And A Sole Proprietorship
A limited liability company is a legal entity formed at the state level. An LLC exists separately from its ownersknown as members. However, members are not personally responsible for business debts and liabilities. Instead, the LLC is responsible.
A sole proprietorship is an unincorporated business owned and run by one person. This option is the simplest, no muss, no fuss structure out there. You are entitled to all the profits of the business.
However, unlike an LLC, you are also responsible for all of the liability.
Create Something Of Your Very Own
Whats great about starting your own business is that you can start it very small with basically nothing and grow it at your own pace.
Believe me, It is a wonderful feeling to lay the foundation of a business and watch it grow as you pour your heart and soul into it.
There are so many exciting achievements to look forward to. Making your first sale, breaking even, hiring your first employee, getting an office
Before you know it, you wont believe how far youve gotten. You will run a business that you can look at and be proud of.
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Advantages Of Sole Proprietorships:
- It’s the easiest type of business to form the second you sell a product or service, you are a sole proprietor.
- As sole owner, you are entitled to all the profits of the business.
- No partners or members to deal with you make all decisions when it comes to your business, which means complete control and flexibility.
- No annual filing fees, state licensing fees, etc.
- Don’t have to pay corporate tax.
Benefits Of An Llc Over A Sole Proprietorship
The first and most significant benefit of LLCs is your ability to protect your personal assets from any debts or losses made by the company.
The second advantage lies in a potentially effortless transfer of ownership of the company to another party. Theres also the issue of bringing new partners on board without having to change the structure of the business.
The third advantage is the option to choose how you pay taxes. As an LLC, you can pay taxes as a sole proprietorship , S corporation, or C corporation.
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Start A Sole Proprietorship Or Partnership
To conduct business as a sole proprietorship or partnership, you need to reserve a business name and register the business.
If you’re going to do business under your name, you do not need to request a business name or register the business with the province.
OPTIONAL: If you’re not sure which business structure you should choose,consider the different business structure options available. You may also want to:
- Explore resources from the Small Business Branch or Small Business BC
- Get advice from a chartered accountant or lawyer before setting up your business
Request and reserve a business name online
Businesses must have their name approved and confirm that it doesn’t conflict with a name already being used by a corporation. Only incorporated companies, cooperatives or societies can guarantee exclusive use of their name. Find out how to choose the right name.
If you’re unable to submit a request online, complete the Name Request form and mail it or drop it off at a Service BC locationwith payment. Make cheque or money order payable to the Minister of Finance.
It takes about 7 to 14 days to process a name request.Once it’s complete, you’ll receive a confirmation email and a name request number you can use to register your business. Be sure to complete the registration before the name request expires . If not, you’ll need to submit another name request. Request priority service if you need to have a name approved in 1 to 2 business days.
With The Correct Business Structure Success Awaits
Just as every small business is different, so will the best option for said business. And, yes, as your company grows and changes, you can change the business structure. Consulting a respected, trustworthy tax attorney or business advisor is a good first step in determining which business structure will be the best option for you.
Once youve decided which legal structure and name youll choose for your business, the next step is to create a brand for your company. Here you can learn how to do that:
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Only Llcs Can Choose Corporate Tax Status
A key difference between LLCs vs. sole proprietorships is tax flexibility. Only LLC owners can choose how they want their business to be taxed. They can either stick with the defaultpass-through taxationor elect 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 flat 21% corporate income tax at the federal level .
LLCs can sometimes save money by electing corporate tax status. When a company is taxed as a corporation, dividends from the business are usually taxed at a lower rate than ordinary business income. Plus, retained earnings in a corporation arent subject to income tax. In contrast, LLC members cant treat income as dividends and must pay taxes on all profits of the business, whether retained in the company or not. A corporation is also eligible for more tax deductions and credits.
