Choosing between a sole proprietorship vs. LLC California is an important decision for every business. The structure that you choose will have a direct impact on the taxes that you will need to pay and the liability protections to which you will have access.

LLCs vs. Sole Proprietorships

When you are first starting your business, one of the most important decisions you will need to make is whether you will structure your business as a sole proprietorship or limited liability company (LLC). Each business structure has its advantages and disadvantages, so before you make your decision, you need to carefully consider your business's nature and your personal circumstances. There are several factors you should keep in mind when deliberating between a sole proprietorship vs. LLC.

Ease of Formation

The first factor to consider is the ease of forming your business. One reason that sole proprietorships are so popular in the United States is that they are very simple to form.

Structuring your business as a sole proprietorship is very affordable and requires much less paperwork than forming an LLC. To form your sole proprietorship, you only need to obtain the correct permits and licenses, and then begin doing business. On the other hand, if you decide to form an LLC, you will need to register your company with your Secretary of State.

Registering your LLC requires writing and submitting Articles of Organization, as well as paying required filing or registration fees. In some states, the cost of registering an LLC is hundreds of dollars. The filing for your LLC must cover several crucial pieces of information, including:

  • Your chosen company name.
  • Your principal office's location.
  • A list of your company members.
  • How long you expect your LLC to last.
  • Other information that is required by your state.

If you want to form an LLC, you should expect to spend more effort, money, and time compared to a sole proprietorship.

Raising Start-Up Capital

Regardless of the type of business you are establishing, you will need to raise capital to cover your start-up costs. Those who choose to operate a business as a sole proprietorship will either need to apply for a loan to cover their start-up costs or pay for these expenses out of their own pocket. Unfortunately, for new entrepreneurs, being approved for a loan or acquiring a line of credit is extremely difficult.

In many circumstances, banks will require sole proprietors to personally guarantee a loan. After forming multi-member LLC, you may have an easier time finding an investor. However, if your LLC has a single member, a personal loan guarantee may still be required.

Taxation Benefits

One of the biggest issues to consider about LLCs and sole proprietorships is their taxation. When choosing a sole proprietorship, for example, you will need to report your net business income on your personal tax return. A Single-member LLC is a disregarded entity, which means it gets taxed exactly the same as a sole proprietorship.

Both single-member LLCs and sole proprietorships can take advantage of a variety of business tax deductions. For example, both types of business may opt to use the new 20 percent pass through-deduction. Because they sole proprietorships and LLCs have similar tax requirements. it's not necessarily a deciding factor when picking between these two structures. You should make sure to consult with a tax attorney to find out how the structure you choose will impact your local or state taxes.

Managing Your Business

If you're the type of person that prefers being their own boss, then forming a single-member LLC or sole proprietorship is a very good decision. Choosing either of these options means you will be solely responsible for operating your business, meaning you would handle management duties, marketing, and controlling your company's finances.

Operating either of these business types also means you would not need to seek approval before making decisions for your company.

Personal Liability Risks

When you run a sole proprietorship, you and your business will be legally indistinguishable. Because you and your business are one and the same, you would be personally and legally liable for all debts owed by your business. If your business loses a legal judgment, or you cannot pay your debts, your personal assets such as your bank account and your home can be seized. The biggest advantage of forming an LLC is that your business and yourself will be legally separate entities.

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