Wondering whether to choose a sole proprietorship or an LLC for your new business? Find out the characteristic features of each and then make your decision.
Sole Proprietorship vs. LLC: Key Features of Each
Before you decide which type of business entity is best for you, you must first understand what each of these offers. In this section, you will learn about the characteristics and features of both sole proprietorships and LLCs.
Go through each of these and understand what each entails before you decide which one to choose for your business.
Here are the characteristics of a sole proprietorship:
- Can be started by a single person and does not require multiple partners or entities.
- The onus of fulfilling financial liabilities falls solely on the sole owner.
- Quick and easy to set up and start operating.
- Startup costs are much lower compared to an LLC.
- Provides complete administrative control to the owner.
- The owner is entitled to all the profits and losses the company makes.
- Owner needs to file business tax returns as a part of their personal income tax filings.
- They also need to a 15.3% self-employment tax to the federal government.
- Sole proprietorships usually require the owner to fund the business and it is difficult to find outside funding for it.
These are some of the key features of an LLC:
- Can be formed by two or more partner, also known as LLC members.
- Members can be individuals, consultants. Foreign entities, or other LLCs.
- Banks and insurance companies, however, cannot be members of an LLC.
- Setup process is slightly more complex than that of a sole proprietorship.
- Forming an LLC requires state filings, initial filing fee, and ongoing annual fees.
- Members of an LLC do not hold any personal liability for sharing the company’s financial burden.
- LLC members can choose to participate actively in the running of the company or remain inactive partners.
- The profits are shared among members in the ratio of their ownership interests.
- Members can also choose a different profit-sharing system, as long as they all agree on it, right from the beginning.
- An LLC can have pass-through taxation like that of a sole proprietorship.
- It can also be taxed as a single member, partnership, or corporation.
- Easy to find funding for an LLC as multiple partners and entities lend it more credibility.
- However, LLCs need to keep personal and business finances and records separate from each other.
When Should You Choose a Sole Proprietorship?
If you want complete control of your business and are willing to take on the financial liabilities if it fails, then opt for a sole proprietorship. It will allow you to run your company the way you want and have total control over how you want to run your business.
Also, you will need sufficient funds to invest in your business as it is difficult to secure funding for a sole proprietorship. So, if you lack that, you might want to consider forming an LLC.
When Should You Choose an LLC?
If you lack funding and want to protect your personal assets in case the business fails, then an LLC is the best option for you. It is called a limited liability company for a reason: you will not be solely responsible for the company’s financial burdens.
It is easier to secure funding for an LLC, it provides tax benefits, and protects individual members’ personal assets. Overall, forming an LLC is a safer bet than starting a sole proprietorship.
Use this as your reference for understanding the characteristics of each business entity and make your choice between a sole proprietorship and an LLC.
Do you want more information on this subject?
Check out this infographic, which was originally published on GovDocFiling, to learn more.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.