As a solopreneur, you might be wondering about the most advantageous way to establish your business. As a solo business owner, your best options—at least in the early stages of establishing your business when you are operating alone—are likely between registering your business as a sole proprietorship or as a limited liability company (LLC). Which is more advantageous: a sole proprietorship or an LLC? It will depend on your needs as a business owner. We will review the advantages and disadvantages of each. But first, let’s define the two and see what the main differences are between an LLC and a sole proprietorship.
What are the main differences between an LLC and a sole proprietorship?
While it’s perfectly suitable for an LLC to have a single owner, it could also have multiple owners. An LLC is considered a separate legal entity from its owner or owners, which are referred to as “members” of the LLC. The LLC’s members are not held personally liable for business debts or other liabilities incurred by the business, such as lawsuits, accidents, or injuries. Instead, the LLC is responsible.
A sole proprietorship, on the other hand, is always owned and operated by only one person. The owner of the sole proprietorship is entitled to all the profits of the business, but is also responsible for all of the business’s debts and liabilities.
LLC Advantages Over Sole Proprietorship
Whether you decide to register your business as a sole proprietorship or an LLC will vary depending on your personal business goals and concerns.
The single biggest advantage of an LLC over a sole proprietorship is personal liability protection. If you register your business as an LLC, your personal assets—such as your home, car, and personal financial accounts—are protected from business debt collection or, in the case that your business is sued, you are personally financially protected against legal claims against your LLC.
A sole proprietorship offers no such protection as there is no legal separation between you and the business. The debts and obligations of the business belong to your personally. If your business is sued or there are collections actions taken against your business, you personally will be on the hook to pay back the debt or to settle the legal claims against your business. You could also be held personally responsible for liabilities caused by your employees.
Sole Proprietorship Advantages Over an LLC
In a nutshell, starting a sole proprietorship is simpler, less expensive, and less complicated than starting an LLC. One simplification that sole proprietorship offers is that you don’t need to separate your business and personal finances by keeping separate bank accounts. If you plan on taking tax deductions based on business expenses, it might be easier to keep your finances separate for tracking purposes, but you are not required to do so by law. You do however, need to keep accurate financial records for your business, including business income and expenses, in case you are audited by the IRS.
With an LLC on the other hand, by law you must keep separate accounts for business and personal in order to maintain LLC status and the personal liability protection that it affords you. If you mingle your business and personal accounts, then you could lose your limited liability protection. If debt collection or a lawsuit lands you in court, a judge could rule your LLC null and void if you mingle personal and business assets, in which case you lose all liability protection and your personal assets could be used to pay debts or settle legal claims.
Another advantage provided by the simplicity of the sole proprietorship is that you are not required to register your business name if it’s one and the same as your personal name. If you choose a business name other than your personal name, then you should register your Doing Business As (DBA) name with your state.
If you are starting an LLC on the other hand, you must register your LLC with your state no matter what business name you choose. LLC registration does give your business name protection within your state, since there cannot be more than one LLC of the same type or industry with the same name. With an LLC, you must also file articles of organization and write an operating agreement to document the rights and duties of the members. A sole proprietorship does not require you to do any of this.
As an LLC, you will also have to pay a filing fee, which varies by state. You may have to pay to renew your LLC periodically, and some states may require annual or periodic reports. A sole proprietorship requires no such filings, which means another point scored by the simplicity of sole proprietorship.
Depending on your needs and comfort as a business owner, whether it’s liability protection or ease and simplicity that you are craving, the choice may be clear as to which type of business structure you should choose. Some business owners get peace of mind knowing they are legally protected from financial claims against the business, while other business owners prefer to keep things fast, easy and simple. It’s up to you to choose what is best for you and your business. You can always change your business structure later should your needs and desires as a business owner change.