Starting a business involves making a wide range of important choices during the early stages of your business’ growth. For example, as an entrepreneur, you need to select the right corporate structure for your business.
You have many options from which to choose when doing so. Like many small business owners, you may be considering starting an LLC or a sole proprietorship.
Neither choice is universally “better” than the other. You need to weigh the pros and cons of each to determine which is ideal for your goals and needs. The following tips will help:
Generally, most entrepreneurs consider starting a sole proprietorship to be easier than starting an LLC. That’s not to say that starting an LLC is necessarily difficult. However, starting an LLC usually requires filling out more paperwork than would be required when starting a sole proprietorship.
Thus, you may be more inclined to start a sole proprietorship if you're not certain whether you want to dedicate much time to running a business, and would rather simply “experiment” with one before determining if being a business owner is a goal about which you’re serious.
When you own an LLC, you also need to file a separate tax return for your business. That’s not the case when you own a sole proprietorship. You can pay your business taxes along with your personal taxes, which naturally makes the process much simpler.
This is an extremely important factor to consider when determining which corporate structure is best for your business. One of the main benefits of forming an LLC is that this particular structure protects you from liability issues.
In other words, if someone were to sue your business for any reason, they would not have the option of suing you personally. They could potentially recover compensation for an alleged wrongdoing in the form of your business’ assets, but they could not collect your personal assets.
Again, none of this is to say that forming an LLC is the right choice for all small business owners. It’s simply important to be aware of the way in which forming an LLC may protect you. This is not a type of protection you would enjoy if you were to form a sole proprietorship.
It’s important to understand that the laws and regulations pertaining to business structures can actually vary to some degree from one state to another. You must research the laws in your state to confirm you thoroughly understand the difference between an LLC and a sole proprietorship based on where you live.
That said, as the name implies, a sole proprietorship almost always has a single owner responsible for making critical business decisions. An LLC can usually have multiple owners. Consider this if you’re starting a business with partners or believe you may take on partners at some point in the future.
Don’t assume that means starting an LLC is always the smarter option. Some small business owners learn that an LLC can have multiple owners and immediately jump to the conclusion that this inherently makes an LLC superior to a sole proprietorship.
That’s not necessarily the case. Some eventually find that a structure which limits ownership to a single individual adds a degree of simplicity to running a business that can sometimes be impossible to achieve when multiple owners are involved.
All that said, you should keep in mind that this isn’t meant to be a substitute for professional business advice and counseling. You shouldn’t make a decision to start an LLC or sole proprietorship based only on what you’ve read here. This guide is simply meant to help you begin thinking about your options.