What is an LLC?
When forming a business in the United States you have a few options of the business structure in which you will operate in. Limited Liability Companies (LLCs) are an option that protects the owners and protects them from being liable for the company's debts or liabilities.
For those who run a sole proprietorship, choosing to change your business structure to an LLC may be a good option. First, you will need to understand the difference between an LLC and a sole-proprietorship to decide which is best for you.
Advantages & Disadvantages of LLC
The benefits of starting an LLC outweigh the disadvantages. One of the main benefits of starting an LLC is liability protection. LLCs legally separate you from your business. With an LLC you cannot be sued individually from a lawsuit derived from your business. Businesses look more professional with the title of an LLC, building trust with your customers.
Tax flexibility is another advantage of starting an LLC in Delaware. For more benefits of starting an LLC in Delaware check out our LLC benefits page.
Although there are many advantages of starting an LLC, there are a few disadvantages associated with Delaware LLCs. LLCs are a little more expensive to operate than a sole proprietorship.
What is a Sole Proprietorship?
Also known as simply one person acting in business, a sole proprietorship is also referred to as a proprietorship. Sole proprietorships are unincorporated businesses that have only one owner. This person will pay personal income tax on profits earned from the business.
Advantages & Disadvantages of Sole Proprietorship
The main disadvantage that comes with being a sole proprietor is that there is a potential to pay more in taxes due to everything being earned income. The other disadvantage that is somewhat dangerous in certain aspects, is unlimited liability. If your business is sued, so are you. The lawyers can come after your assets and you can lose everything.
When operating as a sole proprietorship it can also be difficult to grow or raise money. This is because you are required to have a business account to apply for a loan, and typically won’t be given one unless you have a corporation or LLC set up. Overall, a sole proprietorship is simply not viewed as being professional
LLC vs Proprietorship: What’s the Difference?
Most often those who operate as a sole proprietorship will own a small or part-time business. They typically will operate without any employees, and it costs nothing to establish a sole proprietorship. Unlike a sole proprietorship, LLCs are a hybrid of both a partnership and a corporation. These provide the liability protection of a corporation with the tax advantages of a partnership.
The start-up process for an LLC is a bit more complicated than that of a sole proprietorship.
- Pick a name that has not to be used or registered in the state of Delaware.
- Choose a registered agent: This should be someone who has a legal address in the state of Delaware.
- Pay $90 and file a certificate of formation: This should include the LLC's name, registered agent’s information, and signature of an authorized person.
- Prepare an operating agreement: This is an internal document that states how your LLC will be run and managed.
- Obtain an EIN: This is your LLCs IRS Employer Identification Number. Similar to a social security number, but for your business.
LLC & Sole Proprietorship Taxation
If you operate your business as a sole proprietor, then you will be taxed as a self-employed person. This then means that the income of your business is considered your personal income for tax purposes. You must declare this on your income taxes.
Additionally, an LLC may make an election to be taxed as either a disregarded entity, a partnership, a corporation, or an s-corp. If an LLC does not make an election, then it will be automatically taxed as a disregarded entity or a partnership, depending on the number of members it has.
Should You Start an LLC or Sole Proprietorship
Starting an LLC is great for anyone who is starting a business, or for someone that runs a sole proprietorship. Especially if you are concerned about limiting your personal legal liability as much as possible. This is because LLCs can be used to own and run almost any type of business. They allow you to separate your business from your personal life, and ensure that your personal securities are safe.
If you run a sole proprietorship but do not make a huge amount of profit, then you may not need the protection of an LLC. Especially if you do not own a home or any other assets. LLCs are good for people that have assets to protect and run a business that has any form of risk to be sued.
Written By
Jonathan is admitted to practice law in Colorado and Wyoming. In this position, he helps business owners at nearly every level and in nearly every industry with asset protection, estate planning, and business formation. Beyond business owners, Jonathan also helps activists of all political persuasions to legally protect themselves.
