Sole Proprietorship or An LLC?
Looking to start your own business or already have one, this question comes up all the time “Should I run my business as a Sole Proprietorship or an LLC“? There is no one answer to the question, but by asking yourself what you are looking for you can often find the best match for you.
What is a Sole Proprietorship?
A Sole Proprietorship is an individual business owner. The individual is running as themselves and not a separate entity. It is still considered good practice to create and keep separate accounts for records in order to separate personal funds, assets, and liabilities from business funds, assets, and liabilities. There is no legal difference between the business and the person and if taken to court the owner’s personal assets would be subject to the liabilities of the business.
Individuals may often prefer to run a Sole Proprietorship and a Doing Business As (DBA), but they are still running the business as them the person. This is just a fictitious name that the business uses in order to visually appear and advertise better, but it’s true legal name is different. A (DBA) is not a separate business entity, so again personal assets would all be subject to liability.
What is a LLC?
A Limited Liability Company (LLC) is a separate entity the individual must register with the state, and pay a one time or annually filing fees that may range from $50 to $800 depending on the state. An LLC must also file annual reports with the state and pay the state fee in order to maintain its legal status, the Sole Proprietorship has no annual compliance of fee.
Besides having to pay state fees and filing annual reports, the LLC must also keep records for tax purposes of all incoming and outgoing accounting to separate its assets and liabilities from those of the individual and to preserve the limited liability protection offered by choosing the (LLC) form of business.
The LLC if taken to court, would have its own assets subject to liability, and not the assets of the individual. So long as the individual keep adequate records and make sure there was no legal distinction between the individual and the business. If proper records are not kept, the LLC can be pierced and the individuals assets would also be subject to liabilities of the business.
Quick Advantage vs. Disadvantage of Both.
- Lower Start Up Costs – No State Fee, No DBA Name
- No Annual Compliance – LLC must file annual reports with the State.
- Easier Accounting – Besides keeping records for tax purposes, and separating personal and business assets, there are no specific requirements
Limited Liability Company:
- Personal Liability – This is the main reason for choosing an LLC over a Sole Proprietorship, the LLC generally limits the exposure of the individual(s) personal assets from liabilities of the business.
- Ability To Raise Capital – Growing your business from the ground up and keeping records can make it easier to get a loan, and raise private capital from a bank or future equity investors.
- Easier to add, change Business Ownership – If the LLC is sold it can be easier to transfer assets to the new buyer, also if new investors are brought into the business the operating agreement can be changed in order to form new partnerships in order to grow the business.
What Is The Best Choice For Your Business?
There is no best answer to whether a Sole Proprietorship or Limited Liability Company is the best entity.
- Do you have a large amount of personal assets (House, Car, Retirement, Child Funds)?
- Do you plan to grow your business and need to raise future capital?
- Do you plan on transferring or selling off assets or passing on the “Family Business”?
- Do you foresee any possibility of significant liabilities in the Business?
If you have little in personal assets, you can always start your business small as a Sole Proprietorship. Once your funds are adequate, and growing you can form an LLC to grow your business. If you have personal assets to fund your business, and your business takes risks then it may make more sense to start with an LLC.
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I am not a Financial Adviser, Attorney or CPA and no financial, legal or tax advice is being provided.
State laws and individual circumstances may vary, consult your Financial Adviser, Attorney, or CPA before you make any decisions or take any action that could affect your business.