A limited liability company (LLC) and sole proprietorship both have positives, negatives, and different potential outcomes. While LLC’s have more to offer in the long run, they also take more work to establish and sustain comparatively. Here is a basic comparison between the two business structures.
This is one of the most basic business models you can implement. This is completely under your ownership, so you don’t have partners or shareholders. There is no need for paperwork to establish it, and you will be the sole owner.
- Start-up: There is no need to file any paperwork to start a sole proprietorship. If your business is already providing services or selling products, then you are an established proprietorship. It is important to keep in mind that you are still subject to IRS regulations.
- Simplicity: You are not required to file minutes, have organizational articles, or separate finances. Other business models are required to establish a formal business structure, however a sole proprietorship does not.
- Taxes: In a sole proprietorship, you are not required to separate your personal and business finances in a separate entity (although you should always have a method to separate finances for accounting purposes). On your tax return, you will file as a single entity and your business finances will pass through to your personal filing.
- Liability Protection: Because there is no separation between your personal and business finances, you are personally at risk. If a client sues you, then your personal assets (money, house, car, cash) are liable for the settlement.
- Growth: This business model is only viable if you plan to stay small. There is no room to add employees or partners.
A limited liability company is an efficient business structure because it allows for independence and legal protection. It takes more time to create an LLC compared to a sole proprietorship, but it is not too difficult to complete if you know what to do.
- Liability Protection: Your business finances are not connected to your personal, allowing for legal protection.
- Growth: Unlike a sole proprietorship, you can easily add employees or partners to your business in an LLC.
- Taxes: You are allowed flexibility as an LLC, so you have the option to be taxed as an individual and your business will pass through you or your business will be taxed separately as a corporation. Filing to be taxed separately is a sound option for keeping your personal finances from being liable for mishaps.
- Filing: It is more difficult to register an LLC compared to a sole proprietorship. There is a small fee and a few requirements that are easy to follow when you register your business.
- Separation: If you combine your personal and business finances, you will personally be liable. Therefore if a client sues you, your assets will be at risk. This is avoidable by filing your LLC separately.
Both sole proprietorships and LLCs run much more smoothly than corporations. There are less regulations and paperwork that are required. However it is important to be aware that venture capitalists do not typically invest in either of these business structures, and instead prefer corporations.
When the time comes for you to decide on one of these business models, it is important to consider what you want out of your business. If it is going to remain small and simple, a sole proprietorship is the easiest route. If you would like to see growth in your company and flexibility for the future, an LLC is the better option. Be sure of what you want out of your business early to save you from unnecessary stress. If you are unsure about which option is the best for you, or you have questions about the process, speak with an attorney about your options.