Many entrepreneurs initially start a business as a sole proprietorship instead of a limited liability company. One reason for this is that forming a sole proprietorship allows entrepreneurs to have total control of the business. It’s also affordable to form and getting started requires little paperwork. However, the major disadvantage is that sole proprietorships do not provide owners with liability protection. If something unforeseen should impact the company, like a lawsuit, the owner would be held entirely responsible. If you are unsure of what is meant by an LLC, visit this site. When choosing between an LLC and a sole proprietorship it is essential that you take the following factors into account:
- Limited liability companies provide business owners with liability protection
When you set your business up as an LLC your business legally becomes a separate entity. If your business gets sued your personal assets and property will be protected. On the other hand, if your business were a sole proprietorship, your personal assets would be at risk. That means that your savings, property, and any other assets can be seized by creditors to settle the company’s debts. As the owner of a sole proprietorship, you are the only owner in charge of all decisions, and you are responsible for everything. There isn’t someone above you making the decisions for you that you can rely on in difficult situations.
- You can choose the way an LLC is taxed
If you operate your business as a sole proprietor, you’ll be taxed as a self-employed person, and the income of your business is considered your personal income for tax purposes. A sole proprietorship can be taxed on pretty much everything because their business is not seen by the law as a separate entity. An LLC, however, can be taxed as a sole proprietorship, a partnership, or a corporation. Incorporating as an LLC also avoids the potential double taxation that occurs with C-Corporations.
- You Can Make Changes Easily
Another benefit of the LLC structure to a startup is that once you have set it up, there’s not a need for a lot of continual maintenance. It’s also easy to deal with any breach of contract, add new partners or sell stocks in the entity to someone else. Generally, LLCs have fewer restrictions on many administrative items compared to other business structures. As your business grows you might want to partner up with larger companies and often more significant partners will require your business to operate as either an LLC or a corporation.
- You Can Register Easily
An LLC is an ideal company structure for a startup because it is fast and simple. You can do the registration without an attorney and in some states, the filing fee for an LLC is only $100. Once you’ve registered your LLC with the state, you can get an Employer ID Number (EIN) from the IRS, and get business bank accounts and business checks. Just that quickly, you are in business. The manager of the LLC (often the owner) has the authority to enter into contracts as the LLC. An inventor can also assign their patents to their LLC
- It’s relatively inexpensive
Entrepreneurs often initially incorporate as a sole proprietorship because it’s affordable, but LLC formations are also inexpensive.
The average national cost is $500 for formation, but it may be even less depending on your state of formation. Check with your local Secretary of State to see what the application requirements and fees are to start an LLC and incorporate it as this type of business structure.
In a lot of cases, an LLC and a sole proprietorship can seem very similar. It is the protection an LLC business is offered that a sole proprietorship is not that makes the difference. When deciding between the two the main question you need to ask yourself is -do you want to put your business or personal assets at risk if something were to go wrong?