Whether you're a business owner or a soon-to-be business owner, right now is the best time to decide between a limited liability company (LLC) vs. sole proprietorship. In a sole proprietorship, the business owner assumes the business's risks and debts. This puts their personal assets at risk. Only very low-risk businesses, like
hobbies, should be sole proprietorships. LLCs offer limited liability protection. LLCs protect a business owner's personal assets and LLCs are easy and inexpensive. In our Sole Proprietorship vs. LLC guide below, we explain why forming an LLC is the best option for most business owners. Protect your personal assets.
Northwest will form your LLC for $39 (plus state fees).
Last Updated: July 26, 2022 by the TRUiC Team How to Choose Between a Sole Proprietorship and an LLCThe main difference between a sole proprietorship and an LLC is that an LLC will protect your personal assets if your business is sued or suffers a loss. Most serious business owners choose to form an LLC vs. a sole proprietorship. LLC vs. Sole Proprietorship ComparisonThere are five main factors to compare between a sole proprietorship and LLC:
Liability Protection A sole proprietorship doesn't offer liability protection, but an LLC does. This value outweighs all other factors. Branding An LLC owner can use the business's legal name as its brand name. A sole proprietor must use their surname as the business name or register and pay for a DBA (doing business as) name. Credibility Business owners gain credibility simply by forming an LLC. Pass-Through Taxation Both sole proprietors and LLCs are taxed as pass-through entities by the US Internal Revenue Service (IRS). This means that the business's profits will pass through to its members to be reported on their personal tax returns. All profits are only taxed once, at each member's individual income tax rate. LLCs offer additional tax options such as being taxed as an S corporation. This option offers big savings for some business owners. Sole proprietorships don't have tax options. Cost to Register and Maintain An LLC is a low-cost and low maintenance business structure. A sole proprietorship with a DBA (a registered "doing business as" name) is comparably priced. Start an LLC with Northwest for $39 (plus state fees) and protect your personal assets. Is a Single-Member LLC the Same as a Sole Proprietorship?A sole proprietorship doesn't provide personal liability protection but an LLC does. Sole proprietorships are considered informal businesses whereas an LLC is a formal legal business entity type. They do share a few similarities:
When to Use a Sole ProprietorshipSole proprietorships do offer small advantages and benefits in certain circumstances.
Sole proprietorships are best for small businesses with the following characteristics:
Sole Proprietorship Advantages and DisadvantagesThe only advantage to starting a sole proprietorship vs. an LLC is having to spend no money or energy up front to form a business. This advantage may seem attractive, but it can be costly in the long run. Disadvantages:
When to Use an LLCLLCs offer taxation benefits, increased credibility, and most importantly, personal liability protection. LLCs are recommended for businesses with the following characteristics:
Advantages of LLCs
Ready to Form Your LLC?Our free guide walks you through the process of LLC formation in all fifty states. In just five easy steps, you can be on your way to owning your own business. Start Your LLC Choose your state from the list below to learn how to start an LLC:
You can also use an LLC formation service to register your LLC for you. How to Form an LLCTo form your LLC, you will need to complete these steps:
You can start an LLC yourself using our free Form an LLC guide, or you can use an LLC formation service to register your LLC for you. Step 1: Name Your LLCYou will need to provide your state with a unique name when you file your LLC's formation documents. Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their businesses. Step 2: Choose a Registered AgentYour LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization. Step 3: File Your Articles of OrganizationThe Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization, is the document you will file to officially register an LLC with the state. Step 4: Create an Operating AgreementAn LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC. Step 5: Get an EINAn Employer Identification Number (EIN) is a number that is used by the IRS to identify and tax businesses. It is essentially a Social Security number for a business. You will need to get an EIN after you form your LLC. EINs are free when you apply directly with the IRS. Visit our EIN guide for instructions for getting your free EIN. Related Articles
How to Start a Business
What is a DBA?
How to Name Your Business
How to Form an LLCIs it better to start as a sole proprietor or LLC?One of the key benefits of an LLC versus the sole proprietorship is that a member's liability is limited to the amount of their investment in the LLC. Therefore, a member is not personally liable for the debts of the LLC. A sole proprietor would be liable for the debts incurred by the business.
Do LLC pay more taxes than sole proprietorship?LLCs do not pay more taxes than Sole Proprietorships. Both an LLC and a Sole Proprietorship qualify for pass-through taxation. Pass through taxation basically means that any profits and losses from the LLC or Sole Proprietorship are “passed through” to the business owner and taxed as personal income.
What is the downside of an LLC?Disadvantages of creating an LLC
Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Check with your Secretary of State's office.
Why should I be LLC instead of sole proprietorship?There are a few reasons to open up an LLC instead of operating as a sole proprietorship: You want to expand the company to more than one owner in the future, which is easy with an LLC. You want to protect your personal assets from potential financial and legal liability.
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