Deciding on a business structure when you start a company is one of the first decisions you have to make. Two of the most common are the sole proprietorship and the limited liability company.
A sole proprietorship is the simplest business structure, where you and your business are considered a single legal entity. In contrast, an LLC is a separate legal entity that provides a distinct legal structure for the business.
Formation
Setting up a sole proprietorship is relatively straightforward, and you don’t need to file any formal paperwork with the state. An LLC, on the other hand, requires filing Articles of Organization with the appropriate state agency and may also involve additional fees and requirements.
Liability
As a sole proprietor, you have unlimited personal liability for the business’s debts and legal obligations. This means your personal assets, such as your home or savings, could be at risk if the business faces financial or legal difficulties. In contrast, an LLC provides limited liability protection, which means your personal assets are generally protected from the business’s liabilities.
Taxation
A sole proprietorship is a pass-through entity for tax purposes, meaning the business’s profits and losses are reported on your personal income tax return. You are responsible for paying self-employment taxes on your net business income. An LLC can also be treated as a pass-through entity for tax, but it can also choose to be taxed as a corporation.
Continuity
A sole proprietorship ceases to exist upon the owner’s death or incapacity, while an LLC can have a more extended lifespan, with provisions for the transfer of ownership and continued operation in the event of a member’s death or departure.
As you explore different business structures, it’s essential to understand these key differences between a sole proprietorship and a limited liability company. Use this information to make an informed decision about what’s best for you and your company.