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