Incorporating a business formation is a great way to protect your assets, but not all companies need to include it. The proper business structure depends on the type of business, your goals and personal preferences, and the laws in your state.
Three basic types of business structures exist: Sole proprietorship, partnership, and corporation. Each system comes with its own set of responsibilities, benefits, and drawbacks.
Regardless of your chosen format, you must talk with an attorney and an accountant to ensure you understand your decision’s financial and tax implications.
Here we compare an LLC vs sole proprietorship so you can decide what is best for your business.
Taxes
Sole proprietors are personally and entirely liable for the business’s financial obligations. Owners are taxed at individual income tax rates on all business profits. Every year a Schedule C of their tax return is filed to report those earnings.
In contrast, LLCs are not subject to self-employment tax. This means the new company handles taxes separately from personal taxes. They must file an annual income tax return.
The LLC’s profits and losses are reported to individual members. It is also with the company’s income tax returns. This means the LLCs management of taxes is much more straightforward than that of sole proprietorships.
Ownership and Management
Limited Liability Company (LLC) and sole proprietorship are business entities but differ in ownership and management. One or more members own an LLC, and corporate officers are authorized to manage the business formation.
Sole proprietorship is owned by a single person who can also act as the business manager. Generally, owners of an LLC have limited liability. Yet, owners of sole proprietorships have unlimited personal liability.
The operating agreement mainly defines the management and decision-making processes in LLCs. Yet, for sole proprietorship, the individual owner has total control.
Liability Protection
LLC owners are not usually liable for new business debts, lawsuits, or other legal troubles. They are also not liable to protect their assets.
For sole proprietorship, owners are 100% responsible for all debts, obligations, and claims. This means their assets are at risk.
LLC is not the same as a corporation offering the added benefits of greater credibility and tax advantages. Furthermore, LLCs need more complexity in the initial filing process and ongoing compliance with more paperwork and filing fees.
To learn more about the differences between LLC and sole proprietorship, visit https://www.nav.com/business-formation/.
Formalities
When it comes to formalities, LLCs and sole proprietorships differ in a variety of ways. LLCs must abide by formalities. This includes filing articles for the organization, annual meetings, and a report with the state. LLCs also need an operating agreement in which the members must agree to how the venture should be run.
By contrast, sole proprietorships do not require formalities, and the owner has complete control over the venture without seeking approval from anyone else.
Know the Difference Between LLC vs Sole Proprietorship Today
LLC vs sole proprietorship are two famous business structures with advantages and disadvantages. LLC offers excellent liability protection and can be more suitable for growing businesses.
On the other hand, sole proprietorships are typically ideal for smaller companies as liabilities fall onto the owner. To learn more, consult a business law attorney to find the best solution for your business.
For more tips and ideas, check out the other articles on the blog.
