LLC Sole Proprietorship: Everything You Need to Know
An LLC sole proprietorship does not exist. The formation of an LLC is controlled by the state. LLC is short for "limited liability company".3 min read
LLC Sole Proprietorship
An LLC sole proprietorship does not exist. The formation of an LLC is controlled by the state. LLC is short for "limited liability company." It is different from a sole proprietorship and a corporation. An LLC is most commonly used because it has the flexibility and simplicity of a partnership, while also having the limited liability of a corporation.
A single member LLC is taxed more similarly to a standard sole proprietorship would be. Both a single member LLC and a sole proprietorship can solo-manage the following areas of the business:
An individual or single-member, can conduct business as an LLC, but an LLC can't be a sole proprietor.
State Regulation of LLCs
Each state can be different on the details for forming an LLC. Here are some key things to note about an LLC:
An LLC sole owner can hire independent contractors or employees
The owner of the LLC is not held personally responsible for any of the LLCs debt. It has limited liability (further explained below).
Anyone looking to sue has to sue the LLC, and if the plaintiff wins, they can only be awarded from the LLC's assets (not the owner's).
LLC Advantages vs a Sole Proprietorship and Partnership
In sole proprietorships and partnerships, the owners run the risk of limitless personal liability for anything that the business owes.
When comparing the sole proprietorship or partnership to an LLC, in a sole proprietorship when the assets of the business are not enough to fully cover a debt, the owner's personal property is as risk. This property includes but is not limited to:
Personal bank accounts
Here are the special circumstances that may make an individual liable for an LLC's debts:
If the individual has personally guaranteed said debt
If LLC and personal funds share an account
If the LLC is not insured or has little to no capital
If the LLC doesn't pay taxes to the state
If the LLC defrauds or breaks state law
An LLC can raise funds in many ways, while a sole proprietorship is more limited in this area and usually requires the owner to put up the capital for their own business. The owner for the sole proprietor will often have to seek out personal loans or establish a line of credit with a bank, which can be an uphill climb for the new sole proprietor. Many times, when they are able to secure the necessary funding or loan, they must provide some personal guaranty.
An LLC has an easier time collaborating with other owners who may be more experienced, have access to more capital, or bring some specialized skill set to the table, like management or marketing. An LLC has more flexibility to add new members by simply selling member stakes. It can also make new segments of membership stakes with unique voting and profit specifications. Any investors can rest assured that they will not be held personally liable for company debt.
An LLC can usually sell ownership stakes without interrupting present business operations.
However, a sole proprietorship or partnership, can't be sold completely intact. For a sole proprietorship to be sold, it must independently transfer each permit, license, and asset. New owners will also be required to obtain new bank accounts and a new Employer Identification Number (EIN).
Warning: If You're Considering a Single-Member LLC
If you are considering forming a single-member LLC, it is important for you to make sure that your business has enough capital.
Your company does not have enough capital until it has enough assets or money to carry out all its business functions independently.
You should be forewarned, since if your business is not adequately capitalized, you will be held personally liable for any lawsuits of business debts.
Extra precaution should be taken to make sure that a single member LLC has enough capital to sustain a detached identity from the owner. If this is not done with care, courts will treat the single member LLC as a sole proprietorship and make the owner's liability limitless.
If you need help with the setting up your LLC or Sole Proprietorship, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on 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.