Single Proprietorship vs Corporation: Everything You Need to Know
When comparing a single proprietorship vs. corporation, there are several important factors that you must consider, including your liability protections, tax requirements, and management options. 3 min read
When comparing a single proprietorship vs. corporation, there are several important factors that you must consider, including your liability protections, tax requirements, and management options.
Sole Proprietorship vs. LLC vs. Corporation
A corporation provides several advantages over other business structures, particularly partnerships and sole proprietorships. The primary advantage of a corporation is that the personal assets of shareholders are protected from company debts.
When you form a partnership or a sole proprietorship, you can be held personally liable for the debts of your business. If your company does not have enough assets to cover your debts, creditors can go after your personal property, including your home or bank account. When a corporation runs out of money, shareholder's personal assets usually can't be pursued to cover debts.
However, there are limited circumstances where an individual company shareholder is responsible for business debts. For instance, if a shareholder has guaranteed a debt personally, they may be held liable. It's also possible that the court may decide that ignoring corporate protections and holding shareholders liable for debts is in the best interest of justice. This practice is commonly referred to as piercing the corporate veil.
Circumstances where the corporate veil can be pierced include:
- When corporate funds and personal funds are mixed
- When the corporation does not hold shareholder meetings and has not appointed a director
- When the corporation has minimal insurance or capitalization
- When the corporation has violated state law or has failed to pay taxes
Another benefit of forming a corporation is that you can save a great deal of money on self-employment taxes. Sole-proprietorships must pay a 13.3% self-employment tax on the first $106,800 that they earn. With a corporation, these taxes only apply to salaries. Profits are exempt. This means that forming a corporation can help save thousands in taxes.
Corporations also differ from partnerships and sole proprietorships in that they can last indefinitely. This business structure can last beyond the death of its directors, officers, and shareholders.
Unlike other business structures, corporations can raise capital fairly easily. For example, to raise capital, a corporation can:
- Sell stock shares
- Create new stock stops
- Seek out investors
When choosing a corporation, you should be able to easily transfer ownership shares whenever you need. It's possible to sell ownership shares without interfering in the day to day operations of the business.
It is impossible to completely sell a partnership or sole proprietorship. To sell either of these entities, you must individually transfer permits, licenses, and assets. The new business owner must also apply for a new federal tax identification number and apply for their own business bank account.
Sole proprietorships can also be beneficial in several ways and provide some advantages that are not available with a corporation. For instance, it is incredibly simple to establish either a sole proprietorship or partnership. They are also much cheaper to form. While you will need to pay filing, formation, and state fees, your insurance costs will be much lower than they would be with a corporation.
Unlike corporations, there are very few formalities that apply to partnerships and sole proprietorships. Corporations, for instance, must file formation documents with their state. Other formalities that apply to corporations include:
- The need for shareholder and director meetings
- The need to record corporate minutes
- Needing approval from the board of directors for business transactions
Failing to abide by these formalities may result in the loss of liability protections for the corporation's shareholders. Keeping up with corporate formalities can be extremely time consuming. When you form a general partnership or sole proprietorship, you do not need any organizing documents or operating procedures.
You also won't be liable for unemployment insurance when choosing a sole proprietorship. Corporate shareholder-employees must pay unemployment taxes based on their salary. As of right now the first $7,000 in wages is subject to a 6.2% unemployment tax. The maximum unemployment tax per employee is $434. You will not need to worry about paying for this tax when you choose a sole proprietorship instead of a corporation.
When you pay the unemployment tax required by your state, you can potentially receive a 5.4% offset credit. Effectively this reduces the federal unemployment tax to 0.8%. It also results in a $56 per year maximum tax per employee.
If you need help choosing between a sole proprietorship vs. corporation, you can post your legal needs 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.