Hot topic alert. Should you open an LLC or a Sole Proprietorship?
We will only be covering the fundamental differences between LLC and Sole Proprietorship.
Overview:
A sole proprietorship offers a low-cost option and simplicity.
A LLC offers flexibility regarding how you pay taxes and protection for the LLC owner.
Understanding the differences can help inform the decision that will be right for your business.
| Sole Proprietorship | LLC |
|---|---|
| Less costly | Must register with the state and pay registration or filing fees |
| You are taxed as a self-employed person | Annual fee to maintain the LLC to register |
| The owner remains responsible for the debts and liabilities of the business | Subject to state laws governing LLCs |
| Owner is not protected from creditors | Must keep LLC records and funds separate from your own |
| Owner is not protected from lawsuits filed against the business | LLCs can be taxed as sole proprietorships, corporations, or partnerships |
| No name requirements (other than that the name is not already used in your state) | Name must include Limited Liability Corporation or LLC |
Risks:
Risks associated with a sole proprietorship can vary. If you are sued for any reason your personal finances are at risk. If you own a brick and mortar and someone slips and falls inside your store, you can be sued and your personal finances are at risk. That retirement fund you have been working towards has potential to be at risk as well as your home, car, etc. If your family goes bankrupt your business finances are at risk. An protects against the owner against these types of misfortunes.
Similarities:
Although there are many differences between an LLC and sole proprietorship, one similarity is that if you are the only member of an LLC or a sole proprietor, you will be required to report your income and expenses on Schedule C of your Form 1040. Regardless of whether you pay yourself a salary or pocket any of the net income, the net income will be taxable.
Closing:
Although a sole proprietorship is the cheaper option, the LLC offers protection that will benefit you in the long run. Consult your accountant for further information.