InfoSearched
Published -
- August 4, 2019
- 1:03 am
One of the biggest questions I get as a business coach is “Should I run my business as a Sole Proprietor or setup an LLC?”
Maybe you’ve asked that question yourself. Perhaps you’ve been confused about which one makes sense from a tax perspective for your business.
Or maybe you actually thinking: “I don’t even know what either of those are and why should I care?!”
Today I want to simply explain the differences between the two and give you a simple and easy framework to know which is the right entity for your business.
How can analyzing your business goals and plans help you determine which legal structure is best for your business?
LLC vs Sole Proprietor: Which Is Best for YOUR Business?
Starting a business is an exciting endeavor, but it can also be overwhelming when it comes to deciding on the legal structure for your company. Under many jurisdictions, two of the most popular business formations are the limited liability company (LLC) and sole proprietorship. Each has its advantages and disadvantages, and it is crucial to understand the distinctions between the two options to make the best decision for your business.
What Is a Sole Proprietorship?
In a sole proprietorship, the owner is the only person responsible for the business. This means that the owner is personally responsible for any debts and obligations incurred by the company. Moreover, any profits generated from the business are taxed as personal income tax.
Sole proprietorships are easy and inexpensive to set up and manage because there is no legal paperwork to file. The owner does not have to file a separate tax return for the business, which makes filing taxes more manageable. However, the owner’s personal assets are at risk if the business encounters financial difficulties or legal issues.
What Is an LLC?
An LLC is a hybrid business structure that provides the benefits of a corporation’s liability protection and the flexibility of a partnership. In an LLC, the business and an owner’s personal assets are separate, and the owner is only liable for the amount they have invested in the business. Unlike sole proprietorship, an LLC requires legal documentation to establish articles of organization and operating agreement.
In an LLC, the profits and losses of the business are “passed through” to the owners, who then report them on their individual tax returns. This means that the LLC itself does not pay federal income taxes. However, depending on the state, an LLC may be subject to additional taxes or fees.
LLC vs. Sole Proprietor: Which One Is Best for Your Business?
Choosing between LLC and sole proprietorship depends on various factors. Included in those factors are your business goals, type of business, and future plans.
Sole proprietorships are an excellent choice if you are planning to create a business with low costs. This indicates that you do not have to invest much money at the beginning of your business. Sole proprietorships are also a good choice if you have a small home-based business, and the chances of facing legal issues are low.
On the other hand, if you are looking for liability protection, then an LLC is a better option. This is because it separates the owner’s personal and business assets, and it protects the owner’s personal assets from business lawsuits or creditor claims. Additionally, LLCs offer more funding opportunities, which are beneficial for larger companies with many investors.
Final Thoughts
As a business owner, it is your responsibility to choose the legal structure that best suits your business’s needs. Before choosing between LLC vs. sole proprietor, you should analyze your business goals, the type of business you run, and the long-term plans. This will help you select a structure that is flexible enough to grow with your business while ensuring that you remain protected in the process. Ultimately, each business is unique, and you should choose the best option based on your specific needs.
