Sole Proprietorships vs. LLCs

As a budding entrepreneur, you might face difficulty deciding whether to start out as a sole proprietorship or a limited liability company (LLC). Every kind of enterprise has key benefits and drawbacks, and the type of your enterprise and different business and private events could affect your decision.

Ease and Costs of Formation

In America, starting a sole proprietorship is effortless; therefore, it is the most well-known business entity. In comparison with an LLC, a sole proprietorship is much less advanced and cheaper and requires much less paperwork to start. You'll still need to ensure that you have all required licenses and permits to run a business in your locale.

To form an LLC, you should plan and register your LLC entity with the relevant state agency, typically the secretary of state's office. You should draft and file articles of organization and pay a filing fee, which is typically around $100 in some states. When registering your LLC, you need to spell out your LLC’s full name, principal office location, your members’ or owners’ names, the proposed duration of your LLC, and other state-mandated data.

If your LLC has more than one owner, you might want to ask an attorney to help you draft an operating agreement, which contains details such as capital contributions, rights to profits, and each member's obligation. Establishing an LLC requires more upfront time, cash, and work than establishing a sole proprietorship, so you must consider these matters when deciding which entity is best for you.

Raising Capital for Your Start-Up

To launch and maintain your business operations, you will need capital. A sole proprietorship will require you to fund your own business using your personal assets or loans. Getting a loan approval or establishing a line of credit from the bank or other lending organization can be discouraging for a new entrepreneur, as usually, you will be asked to provide a personal guarantee to obtain a loan for your business.

Connecting to a wide network of potential business contacts can be done by combining all of your members’ resources, if your LLC has more than one member. You can also bring in more members to help fund your new LLC. Reviewing your business investment potential, credit history, and your financial assets will allow you to decide whether you can manage your business alone as a sole proprietor or if you will require additional resources from other owners.

Taxation of Your Business

A sole proprietor’s income is taxed together with an individual income tax return for federal tax purposes. An LLC gets a "pass-through" treatment, permitting allocated profits to be taxed on each individual income tax return of the members. If your LLC qualifies as a partnership or S company, the members could choose to be taxed as a corporation.

Since federal earnings tax is comparable, it does not influence whether individuals select to be treated as a sole proprietorship or LLC. You should seek the advice of a tax professional to find out whether state or federal taxes will affect your start-up’s tax filing.

Your Role in Daily Business Management

If you like being your own boss, you should consider a sole proprietorship or a single member LLC. In both cases, you can manage, advertise, finance, and decide on the insurance policies of the product or service that you are promoting alone.

On the other hand, when your LLC has more members, you will want to delineate your roles and expectations in a working agreement. If you are not skilled in business, it could be useful for you to collaborate and share administration and advertising duties with different members when making decisions for the company. Your business will benefit from their skill, experience, and additional funding.

Risks of Personal Liability

In a sole proprietorship, you and your business are seen as one entity. As a result, you will have limitless private legal responsibility for the money owed and authorized liabilities of your sole proprietorship. Your private property or your private checking account might be levied to fulfill unpaid debts, authorized judgments, and other obligations of your start-up. However, an LLC is a separate entity, and LLC members are generally not personally liable for the LLC’s money owed or its authorized liabilities.

If you need help with a Sole Proprietorship vs. LLC, 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.