1. Liability
2. Control
3. Raising Money
4. Ownership
5. Existence

Understanding the difference between LLC and sole proprietorship is important when considering potential business structures for your new company. You'll need to decide on a specific business structure before beginning the incorporation process in your state of operation.

The right structure for your company will depend on factors such as:

  • Your company's Industry.
  • Your company's location.
  • How many owners the company will have.
  • An established exit strategy.

Most small businesses choose to incorporate as one of two structures:

  • Limited liability company, or LLC
  • Sole proprietorship

The LLC structure combines elements from both corporate and partnership business structures. It also excludes certain negative aspects of the corporate and partnership structures. Eventually, a sole proprietorship can convert to an LLC. Keep in mind, however, that the cost of doing so might be high. For this reason, if you think it might become necessary to convert from a sole proprietorship to an LLC, consider skipping the conversion process and simply incorporating as an LLC.

Liability

One of the biggest differences between an LLC and a sole proprietorship is the amount of liability protection each provides. If you establish your business as a sole proprietorship, you will be personally responsible for liability related to:

  • Any debt your company accrues.
  • Your company's legal obligations.
  • Any legal action taken against the company.

In contrast, incorporating as a limited liability company provides you with a certain level of protection. If any outside entities, such as creditors, take legal action against an LLC, they can't target your personal assets to settle the company's debts. It is important to note, however, that LLC members might be considered liable for company debts under certain circumstances, such as when:

  • The member in question personally guarantees a company debt.
  • The member intermingles personal funds with company funds.
  • The company has a limited amount of insurance or capitalization.
  • The company fails to pay state taxes or violates other state laws, such as committing fraud.

Control

In a sole proprietorship, you have complete control over every aspect of the business, including how the company spends its financial assets. Also, you are not obligated to share business ideas with any other business or individual entity. You alone will be responsible for every decision made about company operations and the use of available resources.

When an LLC has more than one owner, other members and managers are on hand to provide valuable input in regard to managing the company. LLC owners are empowered to hire individuals from outside the company to manage it, rather than being required to handle daily affairs on their own.

Raising Money

Generally speaking, a sole proprietorship will have more difficulty raising capital than an LLC. This is because sole proprietorships are typically viewed as less credible companies because the owner has not made the effort or financial commitment required to incorporate as an LLC. This lack of credibility makes it more difficult for a sole proprietorship to secure business loans and might even force you to use business assets and personal credit to raise operating capital.

An LLC might also choose to create new membership interest classes with different voting and profit options for investors. In contrast, if a sole proprietorship offers a share of ownership in the company to another entity, the business is no longer considered to be a sole proprietorship.

Ownership

If you choose to form a sole proprietorship, it is owned solely by you, the founder. This means there is no legal difference between you and your company. This also means that no other entity, be it another business, trust, estate, or individual, can claim ownership in the company.

LLCs, on the other hand, can offer ownership to an unlimited number of entities, including:

  • A foreign business
  • A corporation
  • Another LLC
  • A partnership
  • Another individual

In addition, ownership interests can be sold to third parties without having to worry about disrupting the company's long-term operations.

Existence

A business structured as an LLC can continue operating forever, no matter who the members or managers of the company happen to be. A sole proprietorship, however, will end immediately in the event of the owner's death, retirement, or decision to sell the company.

If you need help with the difference between an LLC and a sole proprietorship, you can post your legal need on UpCounsel's marketplace. Lawyers from UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.