1. Sole Proprietorship LLC
2. Federal Tax
3. LLC vs. Sole Proprietorship

Sole Proprietorship LLC

While a sole proprietorship LLC is possible, it is important to know that an LLC (Limited Liability Company) cannot operate as a sole proprietorship. Therefore, an individual can, in fact, do business as an LLC. Every state has its own rules and regulations concerning the formation of LLCs within that particular state.

If you are interested in operating as a single owner of an LLC, you can hire employees or independent contractors to help run your business. But keep in mind that you will be the sole owner of the business, and therefore, you will be the one responsible for the oversight and daily operations of the business. With that being said, the LLC will provide you with limited liability over the debts and obligations of your LLC, which means that you cannot be held personally liable.

Federal Tax

Since the Internal Revenue Service (IRS) doesn’t recognize LLCs as business entities, owners of the LLCs must choose how they wish to be taxed. For example, a single-member LLC can be taxed either as a sole proprietorship or as a corporation. If you wish to be taxed as a sole proprietor, then the IRS recommends that you report the LLC income on Schedule C of Form 1040 (personal tax return).

You might also be required to pay self-employment tax since you are reporting the income on your personal tax return. While you might view this as a tax implication, the one benefit here would be that sole proprietors need not file corporate income tax. Therefore, you are not subject to double taxation.

Even if you choose to be taxed in one of the above ways, this doesn’t mean that your LLC converts to that type of business structure. It simply means that you are taxed in that manner. You will still operate your business as an LLC, and your company will still enjoy the many benefits that an LLC has to offer.

LLC vs. Sole Proprietorship

If you don’t know whether to operate as an LLC or sole proprietorship, you’ll want to do some research to learn the advantages and disadvantages of each type of business structure. Most importantly, an LLC offers limited liability whereas, a sole proprietorship does not. However, sole proprietorships are often less costly to form and operate as LLCs.

Additional requirements for the LLC include the following:

• You must register with the state and pay the initial registration and filing fees.

• LLCs pay yearly fees to maintain LLC registration status.

• LLCs are also subject to state laws that provide rules and regulations regarding LLCs.

• LLCs must keep business records and funds separate from personal records and bank accounts.

If you choose to operate as a sole proprietorship, you’ll be required to pay self-employment tax. However, if you choose to operate as an LLC, you can choose to be taxed as a sole proprietorship, partnership, or as a corporation. Keep in mind that if you fail to elect what type of business structure you’ll want to be taxed as, your business will automatically be taxed as either a sole proprietorship or partnership, dependent on the number of members (owners) in the LLC.

A disadvantage to operating a sole proprietorship is the fact that you will be held personally liable for any debts or obligations that your business incurs. Therefore, if a lawsuit is filed against your business, you can and will be held liable for any money owed to the plaintiff(s)in the suit. 

What’s more, a plaintiff can also name you as a defendant in the suit, which generally happens. Since you are not protected from liability, you risk losing all of your assets, including your money, home, car, etc. If you cannot shelter your business by insurance, then a sole proprietorship likely wouldn’t be the best choice for you.

Setting aside the liability issue, sole proprietorships are much more straightforward and cheaper to form and maintain. As long as you obtained the required licenses and permits, you can start your business. With an LLC, however, you must file an Articles of Organization and pay a filing fee, which could amount to a couple hundred dollars in some states.

If you need help forming a sole proprietorship or an LLC, or if you need assistance determining which type of business structure is right for you, 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.