LLC Vs Sole Proprietor: Everything You Need to Know
When comparing an LLC vs. sole proprietor business, it is worth noting that LLCs are more advantageous in the long-run. 3 min read
2. Sole Proprietorships
4. Disadvantages of LLCs
5. Pass-Through Taxation
LLC vs. Sole Proprietor
When comparing an LLC vs. sole proprietor business, it is worth noting that LLCs are more advantageous in the long-run. Overall, you have a variety of options at your disposal in the form of:
- S Corporations
- C Corporations
With that, the most common type of business entity out there is the Limited Liability Company (LLC) and sole proprietorships. A sole proprietorship is most common among startups, but it does not yield the same tax advantages and protections as an LLC.
Sole proprietorships begin as a single person doing business under a company name, otherwise known as Doing Business As (DBA). It is the easiest entity to create, and it is the most popular entity path in the United States. Sole proprietorships allow you to report net incomes and losses from personal income taxes. The main attributes you see in SPs are:
- An organization with no employees
- Small or part time businesses
Starring a sole proprietorship is free, with no costs whatsoever. You only need to file a DBA document with your county clerk’s office to prevent others from using your business name. Filing with a county clerk allows you to:
- Open a business bank account
- Apply for credit cards
- Apply for small business loans
However, you must pay self-employment taxes, which usually comes with a heftier tax burden. With that, it is the easier way to start your own business as a separate entity, and it can pave the way to transiting into an LLC at a later date.
Limited liability companies offer primary advantages over SPs in the form of:
- Protections against debts and liabilities
- Protection from creditors and lawsuits
- Pass-through taxation
LLCs absorb any liabilities or debts, absolving all participants in the LLC. Under an LLC, creditors cannot lay claim to your personal possessions, such as a house or car, to satisfy any judgments against you. Separating your personal and business assets also requires extensive record-keeping to ensure your assets are properly divided.
Disadvantages of LLCs
LLCs are more advantageous, but you must keep in mind a few key rules. First, you need to keep your business and personal accounts separate. Failure to do so not only results in messy finances, but creditors could lay claim to your personal assets if you mix business and personal assets using legal loopholes.
In addition, LLCs are subject to state governance, including annual fees. For instance, you are required to pay annual dues in most states to keep your LLC in good-standing. You must also go through the registration process, and although the filing process is fairly simple, a filing fee of $100 is necessary to complete registration.
Other states may charge fees in the hundreds of dollars. When registering, you file what is known as an articles or organization, which is the primary document that creates your LLC. Starting an LLC could amount to $1,000, but you’ll save more in the long-term when considering the high taxes levied on SPs.
If you are dealing with multiple members of an LLC, you may want to contact an attorney to get sound legal advice on how to best structure your LLC. With that, an LLC with multiple members increases your chances of getting a loan. Start-ups, especially LPs, face a tougher time getting business loans. You may also refer to the Small Business Administration to know if loans are the best route for your business.
Additionally, you must appoint a registered agent for your LLC. A registered agent is someone who accepts legal documents for your LLC and forwards them to your business. State laws vary, but a registered agent must be someone who resides in the state and has a physical address that operates during normal business hours. The good news is that almost anyone can be an agent, including yourself, in most states. Register agents are not required for SPs.
Pass-through taxation is the process of passing profits and losses through the LLC to the personal tax returns of each member. The pass-through method prevents you from paying double taxes, as would be the case under a corporate structure.
With SPs, however, you are responsible for any debts and obligations incurred in your company name, and your creditors have access to any personal possessions you have to satisfy outstanding debts. In addition, pass-through taxation is not available to an SP.
To research more on an LLC vs. sole proprietorship, submit your legal inquiry to the UpCounsel marketplace. UpCounsel retains some of the top lawyers in the country to help clients like you in all matters relating to business law. We will also help you decide whether a sole-proprietorship or LLC is the best path for your business, including additional counsel regardless of which business entity you choose.