Which Should You Choose?
If you are starting a new one-person business you may be wondering whether you should classify your business as a single-member limited liability company (LLC) or as a sole proprietorship. There are several advantages and disadvantages to each option, and depending on what your plans are for the company, one or the other may be a significantly better option for you.
This guide will look at the pros and cons of a single-member LLC and a sole proprietorship and help you determine which option is right for you and your business.
A sole proprietorship is the most common business structure and the simplest to form. Sole proprietorships are unincorporated businesses. Legally speaking, there is no distinction between you and your company. The best part is that this status is automatic — if you are the sole owner of a business, you become a sole proprietor simply by conducting business.
If you’d like to operate a sole proprietorship using any name other than your given name, you’ll need to acquire a DBA (or “doing business as”) name. This will allow you to use an assumed name to enhance the credibility of your business, and provide some privacy protections.
Tax season is also simple with a sole proprietorship. Because the business is not separate from you as a person, any business income or losses are claimed on your personal tax return — there’s no need to file a separate business return.
Another option for a one-person business is the single-member limited liability company. The main advantage of the LLC is the fact that it provides personal asset protection, which means that creditors cannot pursue your personal money or possessions in a potential lawsuit. This is possible because, unlike a sole proprietorship, the government views an LLC as a separate entity from its owner.
Starting an LLC does require business owners to file articles of organization with their state to officially form their business. In addition, there are continued state requirements, filings, and associated fees that your business must comply with in order to maintain its LLC status.
For tax purposes, a single-member LLC is essentially the same as a sole proprietorship. Although, as a rule, your personal and business assets are kept separate, the IRS allows LLC owners to report business profits and losses on their personal tax return.
Whether a sole proprietorship or an LLC is the right choice for your business will depend on a number of factors. Below are some advantages and disadvantages of each to help determine which is right for you.
In general, if your company engages in activities that generate any sort of financial risk — especially those that can’t be mitigated by insurance coverage — an LLC may be the best choice for you.
While it can be more labor intensive and costly to set up and maintain, the personal asset protection alone is often well worth the costs incurred. On the other hand, if your business is fairly simple and risk free, a sole proprietorship can be an excellent way of doing business without taking on any extra regulatory or financial burdens.
Protect Your Personal Assets
Use our free step-by-step guide to form an LLC today