Sole Proprietor or LLC
When starting a small business, entrepreneurs must decide between two legal options when structuring their businesses, either being a sole proprietor or forming a limited liability company (LLC). In order to better understand which is right for your business, either a sole proprietorship or LLC, small business owners need to take into consideration how their business model is structured, what is the foreseen growth in the future and the goals of the company, how many owners operate the business and further how they individually or together want the business to operate.
Not sure what business entity is best for you? We discuss the difference between the two and further help to explain which is right for your business.
A sole proprietor is not only the easiest business entity to both structure and implement but the cheapest as well. There are little to no costs, however on the flip side, it is also not considered a legally binding entity. In order to establish a sole proprietorship, one must simply file the necessary legal documents, including but not limited to name and any local licenses required by the city or state in which the business is located. As the sole owner, you have complete control over any business decisions and to your benefit, your taxes are fairly easy to do since you file both your business and personal taxes together. The rates in which you have to pay are also lower than they typically are for that of a LLC.
Limited Liability Company (LLC)
A limited liability company (LLC) is considered a pass-through entity, this means that because the company is a “limited liability” the business is separate from the individual. Furthermore, an LLC is a separate tax entity, both profits and losses are filed through the owners’ tax return. The purpose and benefit of starting an LLC is the protection in which it provides. Incurred debts and other financial obligations are not held against the business owner, in the same why sole proprietorships are. LLC’s not only provide financial but legal protection as well. Another interesting advantage of starting an LLC is that there is no residency required, that means that you can create an LLC without being a U.S. citizen or permanent resident.
Many believe that forming an LLC gives your business enhanced credibility which many clients, partners, and suppliers view this favorably. However, if you’re a creative or solopreneur, consider the goals that you have for your business and if forming an LLC right away is the best suited option for you.
For 2018 tax purposes, both an LLC and a sole proprietorship can take advantage of new federal tax laws that allow for a pass-through deduction of up to 20% of all business income (for both LLCs and sole proprietorships), which represents a substantial tax break for U.S. small business owners. [LINK]