Whenever you plan to start a business, one of the first things you need to do is select a corporate business structure for it. Doing so is important because each business structure comes with its own set of pros and cons.
That’s why you need to understand which features matter to your business and accordingly select the right business structure. While there are numerous business structures, LLC (Limited Liability Companies) and Sole Proprietorships, are among the most common ones.
So, if you’re confused while selecting between the two, we’re here to help. Here’s what sets them apart from each other so that you can make the right choice.
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If you intend to run the business all by yourself, then you can choose either of the two. However, if you’re planning on having multiple owners, then Sole Proprietorships are ruled out as they can be run by individuals only.
But that’s not the case with LLCs, which can have many owners who are called members. Also, LLCs give you flexibility in terms of the types of owners as well. The members could be other LLCs, foreign companies, or even individuals.
Forming the Company
The process of forming a Sole Proprietorship is simpler than the one for LLCs. You can start running your Sole Proprietorship in your name without many formalities. Alternatively, you can get a fictitious name for your business by filing for a DBA (Doing Business As).
LLCs require a slightly longer process. You are required to file Articles of Organization with the Secretary of State. Once that’s done, you also need an Operating Agreement that elaborates on the roles and responsibilities of each member. Lastly, you need to pay the state filing fees for it too.
LLCs and Sole Proprietorships both offer a pass-through taxation feature. This means that all the income of the business flows through to the individual and this would have to be reported in their personal tax returns.
You’ll have to pay a self-employment tax when you’re running a Sole Proprietorship. The same applies to multi-member LLCs as well. To avoid this, LLCs also allow you to get taxed as an S-Corporation. This saves you from double taxation but you’d have to pay corporate taxes for your S-Corporation.
Now that we’ve established the major differences between Sole Proprietorships and LLCs, you can decide which one is the right fit for you. However, make sure that you do the filing process diligently to ensure that it goes through smoothly. Without it, you might face some roadblocks in the process.
To find out more about Sole Proprietorships and LLCs, you can refer to this infographic that’s created by GovDocFiling.