Before making a decision on how to organize your business, it’s important to understand the options. A single member LLC may be the right choice, but a sole proprietorship may make more sense. Small business owners face a difficult decision with these two. Here’s a look at how an LLC vs Sole Proprietorship are different and which one will provide you with the most advantages.
What is a Sole Proprietorship?
A very common formation for small businesses with one owner, a sole proprietorship is the induvial business owner. There isn’t any separate entity even though sole proprietors should keep separate accounting records and business assets. However, there is no legal distinction from personal and business liabilities and assets.
Often, the sole proprietorship is known as a DBA or Doing Business As form of business. However, it’s not the same thing as a DBA is an assumed name for business, which isn’t the same as the legal name. Many types of corporations also use the DBA status.
What is an LLC?
LLC stands for limited liability company. It’s the least complex of the business structures and provides a large amount of flexibility. LLCs allow for pass-through taxes and legal protection of personal assets for business owners.
Advantages of an LLC vs Sole Proprietorship
The main advantage of a sole proprietorship is the low startup costs. You don’t have to register with your state, which can save you from $50 to a few hundred dollars depending on the state. However, if you use a DBA, you will need to register the assumed name, which will incur a small filing fee and the cost to put a legal notice in the paper.
Sole proprietorships also have no annual compliance, ease of accounting and ease of tax preparation. Often, LLCs and sole proprietorships handle taxes the same.
One of the major benefits of LLCs is the legal protection offers through the limited liability owners have for obligations and debts on the business. Personal assets of owners are protected. In addition, you don’t have to be a US citizen or permanent resident to become an LLC in the United States.
Disadvantages of an LLC vs Sole Proprietorship
The main disadvantage of a sole proprietorship is the lack of personal protection. Your liability will extend to your personal assets and they may not be protected from creditors or lawsuits if you’re a sole proprietor.
Many sole proprietors have a limited ability to raise funds and the business assets can be more difficult to transfer, as well. With freedom comes disadvantages and without the proper accounting records, there can be more disadvantages, as well.
An LLC comes with limited growth potential and the possibility of self-employment tax. However, these are the only significant disadvantages in most states, which makes it an attractive option.
Choosing Between an LLC vs Sole Proprietorship
It’s not possible to provide one right answer when deciding which structure is right for your business. If you don’t plan on growing much and you won’t have any outside capital, you may just need to remain as a sole proprietorship. However, if you start to grow, need to transfer assets and you want to protect your personal assets, an LLC is going to become necessary.
You can start as a sole proprietorship and form an LLC later, as needed. Make sure you speak with a professional before making the final decision for your business structure.