Sole Proprietorship vs. LLC

Starting a new business is no walk in the park, and the hardest part may be choosing your company’s business structure. You can either choose one that lets you profit comfortably without worrying about legal issues, or end up with one that has you buried in paperwork from your head to toes.
Unless you’re an expert in taxes or a certified lawyer, weighing your options can prove to be a hassle. Here, we’ll break down sole proprietorship vs. LLC, so you can start choosing with new insight.

Sole Proprietorship vs. LLC: The Main Difference

If you want to go into the nitty-gritty, we’ll do that below. If you're going to cut to the chase, that’s another thing.
In the simplest way possible, the main difference between a sole proprietorship and an LLC is that you’re the sole owner and responsible for all liabilities in the former. In the latter, the company is treated as a separate institution from its owners, and it’s entirely responsible for the liabilities.
How so?
An LLC, or a limited liability company, is created at the state level, operating under a trading name. It's considered a fully legal entity, and it has a board of owners, but they’re not responsible for the liabilities and debts of the company. So, for example, in the case of a lawsuit, the owners and their assets are safe from legal liability.
On the other hand, a sole proprietorship is an entity run by its owner. The owner is responsible for all liabilities and debts and is the company’s shield in the face of legal issues. At the same time, the owner gets 100% of the profits and operates under his own name.

Sole Proprietorship vs. LLC: The Nitty-Gritty

Still don’t know how to make a choice? I’ll make it easy for you in a second. Here’s a detailed comparison between the two popular business structures.

The Starting Gun

The first step in forming your business matters, and so, how to start either business structure may affect your choice.
To form a sole proprietorship, you don’t need to do much. You’ll need to get the necessary permits and licenses to operate your business; then, you’ll have to recruit your employees and pick a place. Other tasks include marketing for your business, creating the brand’s logo, and further details.
I wish I could say the same about starting an LLC. However, it’s not as easy, and it’ll take more than just a logo and a headquarters to begin.
To create an LLC, you need to choose a trading name to operate under. Needless to say, it shouldn’t be trademarked by anyone else.
After that, you need a board of business owners, but that’s only if you want a multi-member company. Once you have your board ready, you need to pick one of them to be the registered agent. In the case of a single-member company, that registered agent will be you.
After all that, you need to get the required permits for operating, including an article of incorporation and an agreement; you may need to pay a filing fee for either.
The laws differ from one state to another, so you’ll want to recheck your state’s approach to LLCs.

Everyone’s Pet Peeve: Taxes

Let’s face it; everyone is afraid of taxes, one way or another. When starting a new business, you need to consider how you’ll deal with taxes.
Both sole proprietorships and LLCs have the same tax process because the profit is passed through to the personal tax return of the owner. Surprisingly, an LLC is much more convenient than a sole proprietorship when it comes to taxes because you can tax it as a corporation, a sole proprietorship, or a partnership—whatever suits your business needs.
When you tax it as a corporation, the company’s income gets taxed at a lower rate set by the IRS.
Meanwhile, you only have one option with a sole proprietorship. You report your income and expenses on Schedule C, then file your form. It’s then passed through to your tax return.

Weighing the Pros and Cons

If taking in a lot of info at once doesn’t suit you, here are the listed pros and cons of both sole proprietorships and LLCs.

Pros of Sole Proprietorship

  • Less paperwork overall. Unless you need an occupational license, you won’t have to do any state paperwork.
  • The owner gets all losses and profits passed through to his tax return.
  • The owner is able to write off travel costs and advertising costs, as well as deduct business expenses if he uses his own house as the headquarters.
  • You don’t need to do state filings annually, but that varies according to your field or industry.

Cons of Sole Proprietorship

  • It’s harder to get debt financing or a business loan because sole proprietorships can’t easily establish business credit. The best the owner can do is get a personal loan.
  • The owner is in the face of any debts, lawsuits, or legal liabilities, and his personal assets are at risk in case things get south.
  • It’s not easy to get equity financing, so the owner will have to find other ways to fund the business.
  • Without a trading name, the company’s market credibility may be hard to establish

Pros of an LLC

  • The owners’ personal assets are under no risk of liability in the case of lawsuits and legal issues
  • It’s pretty easy to get equity financing or a business loan when operating under a trading name
  • The owners will be able to tax their business as a corporation, which enables them to get lower tax rates

Cons of an LLC

  • The owners will have to pay state, local, and federal taxes. They’re also considered self-employed, so they’ll get a high tax return cost.
  • The owners need to file tons of paperwork to get the required licenses and permits
  • The owners will have to do state filings annually and pay the required fees

Conclusion

Both sole proprietorships and LLCs have their own pros and cons. It’s up to you to decide what you want to deal with.
If you don’t mind a load of paperwork in exchange for protecting your personal assets, an LLC seems like the legit choice. However, it depends on whether you can get a trading name and do the state fillings.
On the other hand, if you prefer to be the master of your seas in exchange for the risk of getting your personal assets under legal questioning, a sole proprietorship is the better option.
Anyway, your field of business is a huge contributor to the decision. Some industries can’t be formed into LLCs, including mule racers and yacht brokers.