Sole Proprietorship vs. LLC Washington State
Choosing between a sole proprietorship vs. LLC Washington state can be difficult if you're not familiar with these two business structures.3 min read
Choosing between a sole proprietorship vs. LLC Washington state can be difficult if you're not familiar with these two business structures. Sole proprietorships, while easy to start and run, do not provide the limited liability protections that you would receive from an LLC.
Business Structure Information
When you're first starting a business, one of your top priorities should be guaranteeing protection of your personal assets from the financial obligations of your business. Two of the most popular business structures, partnerships, and sole proprietorships, do not provide any limited liability protections for their owners.
Despite their lack of liability protections, sole proprietorships and partnerships remain popular choices for structuring a business because they can be formed extremely easily and provide flexible management that is appealing to smaller organizations. Structuring a business as a limited liability company (LLC) or a corporation is more expensive and requires more effort. This added expense and effort is usually worth it, however, because both of these structures provide personal liability protections for business owners.
A benefit of choosing an LLC instead of a corporation is that LLC members are not subject to the strict formalities that a corporation's shareholders must follow.
Sole Proprietorship Advantages and Disadvantages
There are countless benefits that you could receive by operating your business as a sole proprietorship:
- Affordable Start-up Costs: Because sole proprietorships are not required to register with the state, there are no filing fees.
- Annual Compliance: Sole proprietorships do not need to file an annual report, which is a requirement for limited liability companies in most states.
- Simple Accounting: When running a sole proprietorship, you will not need to follow any accounting rules for your business. You only need to make sure that the records you keep will allow you to accurately pay your taxes.
- Easy Tax Preparation: It is much easier to prepare and file taxes for a sole proprietorship than it is with other business entities.
The biggest disadvantage of a sole proprietorship, as mentioned, is that the owner of the business can be held liable for the business's debts. For instance, if you are the owner of a sole proprietorship and someone sues your business, your personal assets, such as your home, can be at risk.
Sole proprietorships also have a much harder time raising capital than more formal business entities. With a sole proprietorship, there is no guarantee that the assets of the business and those of the owner are being kept separate, which will make investors reluctant to provide the business with capital.
Starting a Washington Sole Proprietorship
As in most states, you can form a sole proprietorship in Washington very easily, as you don't need to register your business with the state. To start your sole proprietorship, there are four easy steps that you should follow:
- Pick a name for your business.
- Submit a trade name.
- Acquire permits and business licenses.
- Request an Employer Identification Number (EIN) from the IRS.
In Washington, you can use either your real name or trade name for the name of your business. If you decide to use a trade name, you need to make sure that the name you choose is different from the names of other Washington businesses.
Washington State LLC
For most businesses, forming an LLC in Washington state is the best choice. Although it will take you a little longer to form your business, you'll appreciate having limited liability protections in place. You'll need to follow the rules of the Washington Limited Liability Company Act to form your LLC in this state.
The most important requirement for establishing your LLC is filing a Certificate of Formation. You should file this document with the Washington Secretary of State. If the Secretary of State accepts your Certificate of Formation, your LLC will be established.
Unlike corporations, which must complete several additional steps after filing their formation documents, nothing further is required of LLCs after approval of the Certificate of Formation. The members of Washington state LLCs do have the ability to write operating agreements that will outline how the company will be run. Having this document is not a requirement. Forming an LLC requires paying a $230 filing fee.
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