If you’re just starting your business, you probably have questions about its structure. We would like to provide you with a side-by-side comparison to consider which one’s best for you when it comes to deciding between a sole proprietorship or a Limited Liability Company (LLC).
A sole proprietorship is a type of business structure that is owned and operated by one individual. It is the simplest and most common form of business organization, but it has a LOT of drawbacks, and frankly, not a lot of “perks.” It is easy to set up. Actually, it’s so easy to set these up, that most people “accidentally” set these up, without even knowing it! That’s not a good thing, though, if the business were ever to get sued! Since there is no limited liability with a Sole Proprietorship, those lawsuits get to go after literally everything you own (your house, your savings, your other businesses, all of your assets, even your inheritance).
A Limited Liability Company (LLC) is a business structure that combines the flexibility and tax advantages of a partnership with the limited liability protection of a corporation.
Here’s a handy breakdown of the differences between these entities:
Sole Proprietorship | LLC | |
| Ownership | Only one person who has full control and makes all the decisions
| Can be one or more members who are individuals, corporations, other LLCs, or foreign entities.
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| Legal Status | Are considered the same entity—the business IS the individual.
| Separate entity which means it can own property, have contracts, and sue or be sued independently of the owners.
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| Liability | Unlimited personal liability for any and ALL business debts or obligations.
| Limited to the amount they have invested in the LLC. Personal assets are protected.
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| Taxation | Income is reported on the owner’s personal tax return. Business is not taxed separately. Profits are taxed once along with any other owner income.
| LLC is a pass-through entity for taxes. Profits and losses are passed through to members and reported on their tax returns. There are Tax Options based on the type of LLC chosen: Sole Proprietorship, Partnership, S Corporation, or C Corporation.
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| Formation | Inexpensive, (way too) easily formed or dissolved. | Requires filing Articles of Organization with the State and paying a filing fee. An Operating Agreement is normally required showing who are the managers and operating procedures, and what happens if an owner passes away.
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| Management | The sole owner manages the business and makes all decisions. | Flexible in how the members or a designated manager handles daily operations.
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| Funding | Funded with owner’s personal resources or loans. Likely unable to obtain business loans or attract investors. | Can attract investors or obtain loans. Can issue membership interests to raise capital.
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| Continuity | The business ends if the owner dies or decides to close the business, meaning you cannot sell the business or give it to heirs. | Can be sold and/or continue when a member leaves or passes away depending on how the operating agreement and state laws.
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| Flexibility | Highly flexible (too much?) with minimal formalities. | Flexible in management and taxation but requires adherence to more formalities and compliance obligations.
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Cost Comparison of Sole Proprietorship vs. LLC | ||
| Startup | Minimal or no fees. Some states require a small fee to register a business name (Doing Business As, DBA) Certain businesses may need specific permits or licenses ranging from $50 to $300. | State Filing Fees: Varies by state, ranges from $50 – $500 Operating Agreement: normally required. Ranges from $600 – $3,000 Name Reservation: Optional, usually $10 to $50 if you reserve before filing LLC.
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| Ongoing | Annual – generally none unless a renewal of a permit or license. Self-employment taxes and business income are reported on personal tax returns. | Annual fees range from $50 – $300 Annual Registered Agent Fees – $50 – $300 Taxes – LLCs are pass-through entities for federal tax purposes and losses on their personal tax returns.
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| CONCLUSION | Less Cost initially and ongoing making this an attractive option for small, low-risk businesses. | An LLC has a higher cost but comes with more options for members, limited liability protection, and flexibility.
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After reviewing the side-by-side comparison, there are two key factors to consider when forming a company—tax consequences and personal liability. Certain types of legal entities provide better tax advantages to owners, while others better insulate owners from being personally liable for any debts accrued by the business.
If you are considering starting a company, let Sparks Law advise you on the type of entity to form, explain the benefits and consequences of creating a specific entity, and file the required legal paperwork on your behalf. Contact our team today to get started!
