The decisions entrepreneurs make early in their business’s life can make a big difference later on. Choosing whether or not to register the business as an LLC or keep it low profile and stay or pursue a sole proprietorship is one of those big decisions. In this battle between sole proprietorship vs LLC we look at what an LLC and a sole proprietorship is as well the differences, advantages and disadvantages it poses to entrepreneurs and business owners. TRUiC provides an in-depth guide on LLC and sole proprietorship as well as when to register an LLC and when to use a sole proprietorship.
What is a sole proprietorship?
A sole proprietorship is a business owned by one individual. That individual owner is known as a sole proprietor and the owner assumes all the profits as well as all the liabilities and debts of the company. Basically there is no distinction between the sole proprietor and the business.
What is an LLC?
LLC is the acronym for a Limited Liability Company. This company is registered and is seen as a totally separate entity. The owner of the business and the LLC is separated. The owner of an LLC is not liable for the company’s debts or liabilities.
Sole Proprietorship vs LLC
The main differences of LLC and sole proprietorship are the legal liability of the owners, the number of owners, lifespan and branding. The similarities are how these companies are taxed as well as the registration and maintenance costs.
A sole proprietor is legally responsible for all the debts and liabilities of a sole proprietorship. Should this company fall into bad debt or be sued, the owner will be personally responsible and could lose his or her own personal assets. The sole proprietor is not protected by a sole proprietorship.
An LLC gives its owners full protection against debts and liabilities. The owners of an LLC will not be held personally responsible should the company fall into debt or be sued. All the business owners personal property and assets are protected.
Number of owners
A sole proprietorship can only have one individual owner. A LLC can have an unlimited amount of owners. The owners of an LLC can consist of corporations, other LLCs, partnerships and foreign businesses.
A sole proprietorship will end as soon as the owner dies, sells the company or retires. An LLC can exist forever even if one of the members dies or retires.
The sole proprietor would have to use his or her own name to brand their companies. A sole proprietor can register a DBA (doing business as) name if it is available. The owners of an LLC use the name and the branding of the company and should not use their personal names as branding.
The best example is when companies invoice. The sole proprietorships invoices will be in the owners name and payments will be made to the owner. The owners of the LLC will invoice in the companies name and payments will be addressed to the LLC.
Both LLCs and sole proprietors are taxed by the IRS on a pass-through basis. The profits will have to be declared as the owners income and be taxed accordingly.
Registration and maintenance costs
In many states sole proprietors are not registered and there are no filings for it. The sole proprietor can register a DBA if they want, however it is not compulsory. An LLC has to be registered and filing will have to be done for the company. The costs to upkeep the DBA and the registrations of an LLC is similar.
So who won the sole proprietorship vs LLC battle?
And the answer is… it all depends on you and the company needs. The more risky the company gets registering an LLC would definitely be more beneficial to the owner/s. Should a owner wish to keep the company on a small profit margin and low risks a sole proprietorship would work better