Deciding on an appropriate business structure can have a long-standing impact on your operations, tax liability, and overall management.
There are many business structures you can choose from, two of them being sole proprietorship and LLC. In this post, we will elaborate on the key differences between these two structures. Once you have that intel, you can make an informed decision about which structure to adopt for your business.
Let’s get started.
LLC vs. Sole Proprietorship: The Key Differences
While there are many ways in which the two structures differ from each other, we have identified the top differences for you below:
Sole proprietorships are owned by a single person. LLCs, on the other hand, can be run by multiple entities, including individuals, other LLCs, and consultants. However, companies in insurance or banking domains can’t become members of an LLC.
2. Formation Process
The formation process of sole proprietorship concerns is fairly straightforward. If the company is set up under the owner’s name, there’s no need for any additional filings or documents. LLCs entail a complex state filing process to aid with formation.
3. Setting-Up Costs
Sole proprietorship businesses incur minimal formation costs. In LLCs, there’s an initial formation fee plus annual filing fees in most states.
Organizations with a sole proprietorship structure are run and managed by only a single owner. In this regard, LLCs can be of two kinds – member-managed or manager-managed.
Member-managed LLCs, as the name suggests, are managed by all the members. Manager-managed LLCs are run by a manager who is appointed by the concerned LLC’s members.
5. Profit Sharing
All the profits that a sole proprietorship business generates belong to its owner. For LLCs, profits are shared by members proportionally, according to their ownership interest. Sometimes, LLC profits are shared in some other way, which is clearly defined in the operating agreement.
It’s relatively easy to find financiers for LLCs since they have more credibility in the market than sole proprietorships. Sole proprietors often face challenges with raising funds for forming and scaling up their businesses.
7. Tax Structure
Sole proprietors are required to declare their business gains/losses as their personal income and pay the tax liabilities accordingly. In addition, they have to pay a 15.3% self-employment tax to federal governments.
LLCs can be taxed as partnerships or S-corps. The company’s profits and losses “pass-through” to their members’ personal tax returns.
8. Business Liability
One of the biggest differences between sole proprietorships and LLCs is the liability of the owners. A sole proprietor has unlimited liability. This means that any debt of the business can be directly linked to their personal assets.
On the other hand, LLCs offer limited liability which is typically limited to the investment of the member in the business. To avail the benefit of limited liability, LLC owners need to maintain their personal and business accounts separately.
Need More Information?
There are many more differences between the two structures – LLC and sole proprietorship. To get a holistic view of them, you can check out this infographic created by GovDocFiling:
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
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