When you file a small business, you need to choose a business structure. The two most popular business structures for small businesses are Sole Proprietorship and Limited Liability Company (LLC). The business structure you choose impacts your taxes, liability, and number of employees. You can also change your structure later. However, it is essential to decide which filing structure is right for you. Here are the key differences:
What Is a Sole Proprietorship?
As the name suggests, a sole proprietorship is a business with one legal owner. Sole proprietorships are considered “unincorporated businesses” which means that they don’t have the same paperwork and tax regulations as corporations. Sole proprietorships are also easy to start and manage legally and financially. Owners can do whatever they like with the finances as there are no barriers.
Pros of Sole Proprietorships
● Sole proprietorships are the simplest and most affordable tax filing
● Tax filing is easy as the business and owner are considered the same entity
● Sole proprietorships have fewer business regulations
Cons of Sole Proprietorships
● The owner of the sole proprietorship is responsible for any business debts
● It’s hard to raise growth capital for sole proprietorships
● The owner of a sole proprietorship is responsible for every aspect of the business
What Is an LLC?
LLCs combine the structure of a corporation and sole proprietorship. They have more business and tax regulations than sole proprietorships. However, unlike sole proprietorships, LLCs have both a legal and financial separation between the owner and the company. This means that owners are not responsible for the company’s debts or lawsuits.
Pros of LLCs:
● No personal liability for business debts
● LLCs require more setup than sole proprietorships but they are still simple to file
● LLCs have income tax flexibility and can be taxed as a sole proprietor or as a corporation
Cons of LLCs:
● LLCs are more expensive to file than sole proprietorships
● LLCs have a lot of regulations and requirements from the state
● Ownership of an LLC is not easily transferred
Prepare for the Future
Business owners must decide which is more important for them – simplicity or financial protection and growth potential. If simplicity is the priority, and legal and financial vulnerability is less so, a sole proprietorship might be the way to go. If you want legal and financial separation and plan to grow the business going forward, an LLC is the better option.