Menu
Copyright 2020 – 2022 Business Services Online
LLC vs. Sole Proprietorship
Starting a business is a huge decision, and if you’ve got an amazing business idea in a niche you know you will be successful in, chances are you’re going to want to take every single precaution in turning your business dreams into reality.
One of the first steps that an entrepreneur must make when starting their business is to first register their business – and with that, another question comes into play – “What kind of business structure should I use?”.
Small businesses such as online stores or freelancers have two distinct choices when it comes to registering their business structure: LLC vs. Sole Proprietorship.
In the event of business debt and creditor obligations, your personal assets are not legally protected. As its name suggests, sole proprietorships are also single-owner operations, and if you take a business partner onboard, this business becomes a general partnership.
Sole proprietorships are the simplest type of business structure to register and tax, and requires the least amount of paperwork.
What is LLC?
An LLC, or a Limited Liability Company, is a state-registered business entity that is distinct and separate from the business owners. This means that any creditors of the business cannot legally go after the business owners’ personal assets when your business goes insolvent, or is sued. It can have one or many owners, known as ‘members’.
LLCs also have employee liability protection, which means your business is protected from any liability that is caused by negligence on the part of your employee's actions.
The default tax structure for single-member LLCs are the same as sole proprietorships.
However, LLC business owners can alternatively choose a S Corporation or a C Corporation tax, which allows them the flexibility to choose the most advantageous tax structure that fits their business operations.
If you’re running a business as a sole proprietor, there is no distinction between your business and you as a business owner. There is no need to open up a separate business bank account, however, some may choose to do so as it will make identifying business expenses much easier when it comes to tax filing time.
Sole proprietorship can be used interchangeably with the term “self-employed”. After listing your sole proprietorship income and expenses on your personal tax return, you’ll pay personal income tax on your business profits, and are also responsible for paying your Social Security and Medicare.
LLCs on the other hand, are great for those who want to have some flexibility in their business tax structure, as well as having legal protection from creditors going after their personal assets in the event of insolvency or bankruptcy.
While single-member LLC owners are by default, considered as sole proprietors when it comes to tax, LLC business owners can choose to be taxed as a Corporation. This allows the business owner to be considered an employee of the company, saving them from being subject to self-employment taxes.
LLCs also give businesses a certain kind of prestige – registering an LLC for your business means that in the eyes of the state, your business exists. Customers and clients will be able to see “LLC” or a variant of “Limited Liability Company” during their dealings with you, giving them assurance that they’re getting goods or services from a legitimate company. Additionally, having an LLC in your business allows you to obtain useful business loans that would otherwise prove to be difficult to do with a sole proprietorship.
If you’re wondering which one is best for your business, consider the projected growth of your business idea. If your niche promises to be a highly profitable venture in a short span of time, registering your business as an LLC upfront may be a better idea.
If you want to take things slow at the start, such as a hobby business, a sole proprietorship is the way to go. However, once your business starts to make a significant profit, you’ll need to talk to an accountant experienced in sole proprietorships in order to avoid paying more taxes than you need to.
