There’s no doubt that establishing a new business is a complicated affair, especially the legal side of it. Deciding a business structure tops the list of legal aspects that need your attention.
While researching business entity structures, you might end up asking yourself: Should you create a Sole Proprietorship firm or an LLC? What are the advantages of one structure over the other?
In this post, we will try to demystify LLCs and Sole Proprietorships for you. Read on.
Common Questions About LLCs and Sole Proprietorships
As an entrepreneur, you may have some questions regarding the two business structures — LLCs and Sole Proprietorships.
Who Will Own the Business?
Sole Proprietorship: As the name suggests, businesses of this type are owned by an individual. So, if you plan to take on a partner or two, the Sole Proprietorship option is closed for you.
LLC: LLCs have a more flexible ownership arrangement. It is typically owned by more than one entity called “Members.” Members of an LLC can be individuals, foreign bodies, and other LLCs, but not banking and insurance companies.
How is Tax Computed?
Sole Proprietorship: Business income is taxed as personal income while filing returns. Pass-through taxation enables tax benefits to proprietors since they are taxed only on the personal income component. However, they are required to pay a hefty self-employment tax to the US federal government.
LLC: An LLC can forgo the self-employment tax bit if they choose to be taxed as an S-Corp. That way, members are treated as company employees, not owners. There’s a catch in this scheme though. You’d have to pay additional corporate tax on behalf of your corporation.
How is the Business Formed?
Sole Proprietorship: It won’t be an exaggeration to say that starting a Sole Proprietorship is a cakewalk. You just need to file with the Secretary of State with a declaration that you’d be running the business under your name.
If you intend to use a proxy in your place, declare it via a Doing Business As (DBA) filing. In that case, you will have to pay a recurring filing fee every year.
LLC: To form an LLC, the process is a little more complicated. First, you need to file an Articles of Association, with a formation fee. After that, you submit a document that outlines how your LLC will be operated and managed. It covers things like profit-sharing and management structure. Like Sole Proprietorship, LLC are also required to pay a state filing fee annually.
Need More Information?
We’ve covered only a few concerns around business structures in this post. However, there are many more differences and similarities between LLCs and Sole Proprietorships. To learn about them in more detail, go through this informative infographic, originally created by GovDocFiling.