Limited Liability Corporation Versus a Sole Proprietorship
In case you are all ready to start your business, you know that the next step is to select the structure of the business. And being a crucial part of building a new business, it is vital that you select the right structure for your company. But before you do that, do you know what is the difference between LLC vs. sole properitorship?
It is obvious that you might have these questions in mind that would be making you feel confused entirely:
- Is an LLC the same as a sole proprietorship?
- Which should you choose – LLC vs sole properitorship?
- What are the tax differences between LLC vs sole properitorship?
- What is the merits of an LLC as compared to a sole properitorship?
Well, that is what you would learn about from here. So, keep reading before you make a choice regarding your business structure.
LLC vs. Sole Proprietorship
Let us begin by understanding some basic points that would help us to understand the difference between an LLC and a sole proprietorship. Here are some points that you should know about:
- An LLC has one of the main advantages which is the limited liability advantage, which is not present in the sole proprietorship.
- As compared to an LLC, sole proprietorships are normally less expensive to set up and maintain.
- The LLCs usually have to register with the state and also pay for the initial filing and registration fees. But the sole proprietorship has no such rules.
- The LLC is subjected to the state laws that governs it, unlike the sole proprietorship that do not have such laws to follow.
- There must be an annual fee that has to be paid by the LLC for maintaining the registration of the company.
- As you run an LLC, it is vital to keep all the funds and records of the LLC separate from your person funds and records. On the other hand, for the sole proprietorship, they are always noted together.
- In case you run your business as a sole proprietor, you would have to pay the tax for the company as a self-employed person.
- The LLC has a choice to be taxes as a corporation, a partnership or even a sole proprietorship.
Now that you know the basics about the LLC vs. sole proprietorship, it is vital to ensure that you know all the details about each of them since both have their own advantages and disadvantages. There is no specific best business structure, and for you to choose the right one, you need to see which one matches your specific circumstances.
Below shared are some of the main points that would help you understand the difference between the LLC vs sole properitorship.
By now, you might have had an idea regarding what LLC stands for. But for those who couldn’t make the guess, it is called the limited liability company. And this means that the limited liability is the greatest benefit of the LLC vs. sole proprietorship.
Not sure what the limited liability is? Well, in a sole proprietorship, the owner is responsible for the liabilities and the debts of the company. But in an LLC, the LLC is the one responsible for the liabilities and debts of the company. In short, this means that the members of the LLC are protected from the creditors of the LLC. And that is not all, they are also protected from any lawsuits that could come up against the LLC.
Start-up & Maintenance Costs
Other than the fees for any of the permits or licenses for the sole proprietorship, there isn’t any other costs that you would have for the company. But, on the other hand, the LLCs would require you to register for the state and give the initial fee for registration and filing. And this is not all; there are many other fees that you would have to pay annually like the annual fee for maintaining your registration so that your LLC can be in a good standing.
Along with the annual fees and the filing fees, an LLC is subjected to state laws that govern the LLC. Based on the state in which your LLC has been registered, the laws you need might need you to have a registered agent or an operating agreement for your LLC. Normally, the regulations have an outcome where the other paperworks like the annual reports, statements, or information are not filed and submitted on time to the government. On the other hand, the sole proprietorship has no obligation of such sort.
As per the state in which you have incorporated your LLC, you might have to use the words like “Limited Liability Company” or LLC in the business name. Other than that, there are many other exclusions in terms of words that can be used in the business name. These can be learned about from the Secretary of State.
About the words that should be used, sole proprietorship does not have to follow any such rules. The business name rule that both need to follow is that they are not using the same name that any other business is using in that state or even in the country.
Separation of Business from Personal
While you run a sole proprietorship, you do not have to worry about mixing the business funds with your personal funds. This is because as per the law, both the business and you are taken as one and the same. On the other hand, if you are running an LLC, you have to ensure that both the records and the funds of your company and your personal life is kept separate. In case you do not keep the things separate for an LLC, it can result in the loss of your limited liability protection.
LLC Taxes vs. Sole proprietorship Taxes
In case you are running your business as a sole proprietorship, you would be taxed as a self-employed individual and the revenue of your company would be taken as the personal income and taxed accordingly.
On the other hand, an LLC can be taxes as a corporation, a partnership or even as a sole proprietorship, depending on what they elect to be taxed as. By default the taxation of an LLC is as a partnership (it the partners are there) or as a sole proprietorship. And if the LLC wants to be taxed as a corporation, they would have to file for it.
How can Inc Paradise help you?
The structure of a business is an important and inevitable choice for everyone who wants to own a business. And with LLC vs sole properitorship being the most popular ones, it is important to understand them in detail to make a smarter choice as per your business needs and your future plans. Now that you have decided which one you want, the next step is to register your business.
Inc Paradise can assist you in registering your LLC or sole proprietorship in the US under affordable rates and quickly. In case you are looking for other services like the mail forwarding and the virtual office services, Inc Paradise can assist you with it too.