What is an LLC?

An LLC or limited liability company allows sole proprietors or partnerships to enjoy the benefits of pass-through income while limiting their liability. The liability of the owners is limited to the amount of their investment.

What is a Sole Proprietorship?

When one person runs a business, it is typically known as a sole proprietorship or simply proprietorship. There is no clear line between the owner of the company's personal assets and the assets of the business. Some sole proprietors use a "DBA" (Doing Business As) designation while others make no formal declaration.

LLC vs Sole Proprietor: Pros and Cons

Whenever a person is forming a business it is important to weigh the pros and cons of each business structure. Depending on the product or services you are offering, you may need more personal protection. Here are some of the pros and cons of LLCs and sole proprietorships:

Corporate Entity Pros Cons

Limited Liability Corporation (LLC)

  • Unless there are specific reasons, owner's assets are protected from creditors

  • Easier to raise money for funding company

  • Easier to sell/transfer business

  • Formation paperwork is required

  • Costly legal fees involved

  • Funds may not be comingled with personal funds or liability increases

Sole Proprietorship

  • Ease of setup

  • Lower costs/fees

  • Does not require formal paperwork to form

  • No concerns about comingling personal funds

  • Each owner can lose personal assets to creditors

  • To transfer to a new owner, assets must be transferred individually

  • Sometimes makes raising money difficult

Tax Liability of a Sole Proprietor vs. an LLC

Because a sole proprietorship is only one person, and is unincorporated, it is not treated as a separate business. Therefore, the income and expenses are passed through to the owner and included on their personal income taxes. Schedule C or C-EZ is used along with Form 1040 for claiming income and expenses and self-employment tax is due on the net income of the business.

LLC Taxes

LLCs can have features of both a corporation and a partnership. When there is only one person involved in an LLC it may be classified as either a corporation or a disregarded entity for tax purposes. Should an LLC elect to treat their taxes as self-employment taxes, they may lose any protection from personal financial liability.

If the owner of an LLC uses a C-Corporation designation, they should file Form 1120 and if they use an S-Corporation they should use Schedule K1.

Frequently asked Questions

  • What is Partnership LLC?

    A partnership is formed when two or more people decide to go into business together. Should the partners go further and create a formal set of organizational documents and file them with the department of corporations or secretary of state, they may create an LLC.

  • What is a single member LLC?

    When a sole proprietor forms a limited liability corporation for the sole purpose of doing business under the LLC's name it is a single member LLC. Typically, this is used to protect the individual from the liability associated with company debts and other liabilities.

  • Is a single member LLC the same as a sole proprietorship?

    For purposes of liability a sole proprietorship and LLC are different. A sole proprietorship does not require any special paperwork to get started; the owner simply starts working. It is always a good idea to discuss your options with a business attorney before determining which business structure is right for your needs.