Choosing the right type of business structure is extremely crucial before starting a new venture. Two of the most popular and widely adopted business structures are LLCs and Sole Proprietorships.
Why is that? Well it is because of the factors, such as cost-effective, easy formation and tax advantages. But the main concern could be spotting the significant differences between an LLC and a proprietorship so as to make a better choice.
Well, understanding the differences are important to decide what business structure would best suit your particular business needs. Below are the major differences between an LLC and a sole proprietorship:
LLC vs. Sole Proprietorship: Formation Process
Forming a sole proprietorship is comparatively easier than an LLC. Unlike the documentation required in establishing an LLC, you really do not need to perform heavy paperwork in a proprietorship. You definitely require business permits like a seller’s permit to get started with both the businesses.
Let’s say you’ve planned to start your business in California, you would need a California seller’s permit to start off your business operations. Also, forming a proprietorship is inexpensive compared to other business structures.
LLC vs. Sole Proprietorship: Management Structure
There are usually one or more members in an LLC who manage the entity along with a manager who is hired to look after day-to-day operations. And, all the guidelines governing the in-house operations are laid out in a legal document ( operating agreement).
However, in a sole proprietorship, only the owner calls all the important decisions.
LLC vs. Sole Proprietorship: Liability Protection
The major difference between an LLC and a sole proprietorship is the liability protection. With an LLC comes the limited liability protection which basically means that all the debts and other liabilities of the business are considered separate and the owner is not held responsible for them.
However, a sole proprietorship does not provide the advantage of limited liability protection. All the debts of the business are passed on to the owner.
LLC vs. Sole Proprietorship: Business Name Registration
Choosing a business name for an LLC requires including words like LLC or “Limited liability company’, etc as per the state guidelines. Sole proprietorships don’t face this problem unless they plan to give a separate name to their business. In this case, the company will have to register for a DBA (doing business as), basically a fictitious business name.
LLC vs. Sole Proprietorship: Tax Treatment
An LLC follows a pass-through taxation which means all the profits made are taxed only once. The tax liability is borne by the owner which passes through a personal tax return. In a proprietorship also, the owner is responsible for all the taxes and profits earned by the company. Also, you’re not required to pay taxes on the full amount of your company’s income rather you will pay taxes only on the profit made by your business
LLC vs. Sole Proprietorship : What Should I Choose?
Well, both an LLC and a sole proprietorship have their own advantages and disadvantages. Choosing a business structure depends upon various factors including your business needs. So, it is advised to do your own research or hire a consultant who can help you decide a business structure that suits you the best.