What is a Sole Proprietorship? How do you know which entity you should choose for your business? It can be easy to feel overwhelmed when you’re first starting out as an entrepreneur. Are you in the right tax structure to grow as your business scales? Let’s dive in and help you figure out what the right solution is for you!
What are the key differences between Sole Proprietorship and an LLC?
When you start doing business by yourself, you are automatically acting as a sole proprietor. As the simplest form of running your business, a sole proprietorship makes little to no distinction between you and your business. This means that the business’ obligations are your obligations and the financial responsibilities of the business are also your own.
With an LLC, your business is considered as a separate entity from you. Obligations and financial responsibilities are separate, meaning that legally the business and you are different from each other. The business has a separate name that defines it as a limited liability company, denoted with an LLC at the end of official documents.
Pros of Sole Proprietorships vs. LLCs
One of the upsides to running your business as a sole proprietorship is the startup costs. There is little you need to do besides apply for the necessary licenses and permits you may need in order to do business in your particular region.
The main upside to running your business as an LLC is that you are personally shielded from responsibility for the financial obligations and liabilities of the business. Without having this protection, if your business owes money or is sued for not providing an ordered product or service the way you were supposed to, your personal assets could be on the line.
Legal Requirements
For a sole proprietorship, you need to file your taxes appropriately with a Schedule C, but otherwise there is no paperwork apart from having the appropriate licenses and permits for your particular area.
For an LLC, you need to file your LLC paperwork with the state, get your tax paperwork and EIN completed by the IRS, and other additional paperwork as necessary depending on the kind of business you’re running as well as the necessary permits and licenses you may need at the local level.
For a sole proprietorship, you may use your personal bank accounts to conduct business, though that is not recommended. For an LLC you need to have an official bank account attached to your EIN so you can accept payments and pay your employees.
Why to Consider an LLC over an Sole Proprietorship
In almost all cases it is better to have an LLC over a Sole Proprietorship. The protections provided by an LLC put you in a much better position personally as a business owner compared to those provided by an LLC.
The only scenario you really should consider forming a Sole Proprietorship over an LLC would be if you are planning on never growing the business, do side projects for friends and family, or you only take on work from time to time. An LLC provides you with legal and financial protection that can’t be compared to anything that you would get from having a sole proprietorship alone.
Transitioning from an Sole proprietorship to LLC
You can convert a sole proprietorship into an LLC by filing your certificate of formation, creating a bank account for your LLC, and transferring your business assets, finances, and resources under ownership of the LLC instead of your own personal ownership. You may also need to put together your articles of organization and your operating agreement. The obvious reasons for you to do business as an LLC is to avoid having to have personal financial responsibility and liability for the activities of your business.
When is Sole Proprietorship the Best Choice?
Sole Proprietorship is really only the best choice when you are running a small side business or almost no liability from operating your business on your own. In almost every situation it is better for your business to operate as an LLC rather than as a sole proprietorship.
What are the Benefits as a Sole Proprietor
As a sole proprietor, you don’t need all the paperwork of an LLC to get started. The business tax process is easier to go through since you are essentially just paying taxes for yourself. Banking is easier as you are able to transact as yourself rather than as an LLC. And especially if you are doing business by yourself without any employees or other partial owners, this type of business may work for you temporarily.
Business Structures: Freelance, Entrepreneurs, & Small Business Owners
You want to ask yourself, “Where do I see my business by the end of the year? What do I want my business to accomplish? What type of clients do I want to bring on? Do I want to scale my business and get employees?” If the answers to any of these questions involve growing your business, then you should file for an LLC! At MyCorporation we make it easy for you to start your business with an LLC. Just go to our home page and our team will take care of you with industry-leading customer service!
Compare Different Business Structures and Consult with a Tax Specialist
At the end of the day you want to do what’s right for you and your future business needs. It never hurts to speak with a tax specialist and figure out if an LLC is what’s best for you or if another business structure may be a better fit for your specific situation.
Conclusion:
In almost every situation, running your business as an LLC will be better for you financially and in regards to your potential liabilities. Consider all of the factors we have laid out for you in this article, consider what your future goals are for your business, and make sure to choose the model that’s best suited for what you want out of your business down the line!
Contact us here for more information on how we can help your business.
Sources:
https://www.uschamber.com/co/start/strategy/sole-proprietorship-vs-llc
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
https://www.wolterskluwer.com/en/expert-insights/singlemember-llc-vs-sole-proprietorship
https://www.insureon.com/blog/sole-proprietorship-vs-llc-what-you-need-to-know