Sole Proprietorships vs. LLCs: Your Guide to Starting a Business

Starting a new business is quite a task. There’s just so much that you need to do. Be it finding funding for the business or even coming up with your marketing plan. In such a situation, it can become challenging to decide on a company structure.

Why is that?

One of the biggest reasons for this is that there are numerous business structures that you can choose from. You have to choose from:

• LLCs (Limited Liability Companies)
• Corporations
• Sole Proprietorships
• Partnerships

Among these, Sole Proprietorships and LLCs are fairly popular. To help you understand the differences between both, we’ve put together this detailed guide.

Taxation Differences

Sole Proprietorships and LLCs both offer pass-through taxation. This feature means that the income and expenses of the business will have to be reported when you file your personal income tax returns.

Sole Proprietorship firm owners would have to pay a self-employment tax as well. In the case of LLCs, you’d have to pay the same in multi-member LLCs. To avoid it, you can decide to get taxed as an S-Corporation. However, in this case, you’ll end up paying corporate taxes.

Formation Process

The way you form your business also depends on the business structure you choose. The process to establish an LLC is slightly more complicated and costlier than that for starting a Sole Proprietorship.

You can start and run a Sole Proprietorship firm in your name as an individual. Alternatively, you can apply for a DBA (Doing Business As) and get a fictitious name for your business that you can use.

For LLCs, you have to first file your Articles of Organization. This has to be done with the Secretary of State. After that, you have to make an Operating Agreement. Finally, you have to pay the state filing fees.

Ownership Structure

When it comes to the ownership of businesses, Sole Proprietorships allow only a single person to own the business. The person has to be an individual and can’t be any other entity.

But LLCs are different.

LLCs can be owned by multiple people and entities who are called members. These entities can be both foreign firms and other LLCs.

What’s more?

Insurance companies and banks can’t become members of an LLC.

Now that you’ve got a better understanding of the various similarities and differences between LLCs and Sole Proprietorships, you’ll be better able to decide on the right one for you.

But there’s a lot more that you can learn about them too. Use this infographic designed by GovDocFiling to understand LLCs and Sole Proprietorships better.