There are many disadvantages to forming a sole proprietorship, and many have the desire to change to an LLC after a sole proprietorship has already been established. This is not a problem and can be accomplished in the same way that a business may be constructed as an LLC from the outset.
A sole proprietorship is an informal business structure that establishes no legal separation between the business and the owner. The owner is thus entitled to all of the profit but is also accountable for all of the debt and risk. As enticing as this may seem, the lack of personal liability protection is a massive deterrent and should not be underrated. As such, it’s generally a good idea to change to an LLC. This is possible even if you’ve started out as a sole proprietorship.
What are the major differences between a sole proprietorship and an LLC?
One of the most significant aspects to consider is that an LLC protects your personal assets should the business be sued or fall into financial ruin. A sole proprietorship does not offer this, and the owner’s personal assets are not separated from those of the business.
Why is this important? Personal liability protection is the only thing that stands between you and being seen as personally liable for the legal difficulties or financial trouble of the business. As such, your assets are safeguarded, and your car, house, and bank account are safe, even if the business is in trouble.
When considering the differences between a sole proprietorship and an LLC, there are four main aspects to take into account:
1. Liability security.
This is the most significant benefit of an LLC and is the one that entices most business owners who want to safeguard their personal assets.
LLCs can simply use their business’s name as their brand name whereas a sole proprietorship would have to either use their surname or file for a DBA (doing business as).
3. Pass-through Taxation.
In this aspect, LLCs and sole proprietorships have the same benefit: pass-through taxation. This has the implication that profits from the business filter through to the members who then pay tax on their individual tax returns filed with the Internal Revenue Service (IRS). These profits are only taxed once.
4. Price of registering and sustaining.
Establishing an LLC has an initial price ranging from $40 – $500, depending on the state where the business operations will take place. This cost is for the state filing fee. However, there are still annual fees required to maintain an LLC of good repute. Furthermore, should you make the decision to make use of a service provider, this entails extra costs that vary depending on the chosen service.
However, a sole proprietorship who has filed for a DBA has a similar cost involved.
Why should I choose to change to an LLC?
It’s been established that the advantages range form pass-through taxation, enhanced credibility, and the most significant benefit of personal liability protection.
LLCs are better suited to businesses with bigger customer bases, the chance of instantaneous and maintainable profit, a bigger chance of liability or loss, and the possibility of unique tax options.
As such, if you currently have a sole proprietorship, you should consider changing to an LLC if you are hoping to expand your business and receive a bigger profit. Sole proprietorships are only ideal for businesses with strikingly low-profit and low-risk. LLCs, on the other hand, give owners the ability to expand their business and accept more risk, because of the personal liability protection that characterizes an LLC.
Should you wish to take your business to the next level and form an LLC, TRUiC offers detailed information on the advantages and disadvantages of both sole proprietorships and LLCs, alongside the process for forming an LLC in accordance with your state laws.