LLC or Sole Proprietor (The ULTIMATE GUIDE 2023)

Should you choose to be an LLC or sole proprietor? This question is important to answer, especially if you are working on your own, or are beginning a small business online or offline.

Book a call or speak to us here: https://mollaeilaw.com/start after you read the following information.

 

How Do You Distinguish between Working as an LLC or Sole Proprietor?

The main difference between an LLC or a sole proprietor has to do with liability. When you begin working as a sole proprietor, your personal assets, such as your home or business, are technically at risk. By forming an LLC, however, you erase this risk, as your personal assets cannot be touched if you are sued by a business client. 

Also, when you form an LLC, your taxes pass through to your personal income tax filing. You don’t owe any taxes on your business. This additional convenience makes forming an LLC very attractive.

Selecting an LLC or sole proprietorship is both important and complex. Unless you are a tax accountant or legal expert, the differences between these two business entities can be confusing. That is why you need to discuss any inquiries with a competent attorney. Book a call or speak to us here: https://mollaeilaw.com/start.

 

Where Do You Need the Most Help as a Start-up?

Before you explore your options as an LLC or sole proprietorship, you need to determine where your start-up needs the most help. What do you need, specifically? 

• Help with financing? 
• More information about starting a company? 
• Help with expansion or growth?
• Small business advice?

If you are seeking legal help, you probably want more assistance with starting your company. That is where you will need expert legal advice and continued legal guidance. Book a call or speak to us here: https://mollaeilaw.com/start. 

 

What is the Difference in Your Start-up Activities When Establishing an LLC or Sole Proprietor Company?

The steps you follow when forming an LLC or sole proprietor business will depend on your personal financial situation. If you own a house and have built equity into it, or own vehicles, you will need to do what is necessary to protect those assets. 

Forming an LLC is essential if you want to protect your personal holdings and lower your taxes. If you live in an apartment or don’t drive, you may find working as a sole proprietor to be satisfying, at least, for the time being. 

Legally, if you wish to play it safe and wonder which is better – an LLC or sole proprietor status, always go with the LLC. It is well worth the investment, especially if you want to separate your start-up business activities from your personal activities.

 

How Do You Establish Yourself as an LLC or Sole Proprietor Business?

Basically, you will need to establish yourself as an LLC or sole proprietor business when you start your operations. The following steps should be followed as a basic guide for getting started, regardless of the entity you choose.

#1 Research and establish the business concept

Do you want to provide SEO services? Would you like to establish a marketing company? If so, narrow down the concept and make it workable.

#2 Draft a business plan for your LLC or sole proprietor business.

You cannot establish an LLC or sole proprietor business without some type of plan. In fact, studies show that a business idea with a plan gets off the ground 30% faster. 

Your business plan should be comprised of about 40 pages, or can be shorter, if you are writing a lean startup plan. As long as you have all the information you need to share with an investor, lender, or prospective business partner, you are in business – literally.

If you think writing out the plan may prove to be laborious, check out the business plan software that is featured online. The software is designed to show what to include in the plan and how to make it easy to read.

 

What You Need to Ask When Creating a Business Plan for an LLC or Sole Proprietor Business

When drafting a plan for an LLC or Sole Proprietor business, keep the following in mind:

• What will your business do?
• Who are your business’s customers? This question is important to answer, as it will help you determine your customer base and what products or services to create.
• Who are your main competitors? You need to answer this question, particularly when you are starting out, as you need to know how your competitors are alike or different.
• What makes your business unique or different from the competitors? In other words, what is your start-up’s unique value proposition. A unique value proposition may be your location, one-of-a-kind product line, quality commitment, or lower price point.
• How can customers find you? This question, when answered, can help you develop your marketing approach. How will you generate interest in your business? By word of mouth? By paid advertising? By your website and social medial accounts?
• What do you need in resources? You cannot make money without spending money. Therefore, you will need to find the necessary funding sources to keep going. You also need to list your financial risks and expenses. At this point, you may decide that forming an LLC may need to be done. Book or speak to us here: https://mollaeilaw.com/start to get a head start.
• How will your start-up make money? To answer this question, you need to establish a business model. This model will help you determine how your business will create revenue, cover costs, and make more money than what is spent. Flesh out your start-up’s income streams so you won’t have future financial difficulties.
• How long do you anticipate it will take to realize a profit? To answer this question, you need to produce a revenue forecast. Financial projections, such as a revenue forecast, fuel interest in a business plan. Projections should be slated, so you can plan returns in a span of three to five years’ time.
• What is your ultimate goal? Are you creating a business plan so you can build a business you can sell, or do you want to make your business a long-time venture? You will need to outline the steps you will need to take to realize your primary business objective.

Now that you have a basic idea of creating your start-up, you can learn more about why an LLC or sole proprietor business initiative needs to be chosen.  Before you do so, however, you need to define an LLC and a sole proprietorship.

 

What is an LLC?

An LLC (limited liability company) is a distinct business entity that is formed under the law of a state. The LLC combines the elements introduced in a sole proprietorship, corporation, and partnership.

Owners of an LLC can decide the management structure of their company, operational procedures, and tax treatments. If you are working on your own, you can form a single-member LLC. More than one person can establish a multi-member LLC.

As noted, the major feature and draw of an LLC is its liability protection – protection that extends to business obligations and debts. Therefore, business creditors cannot go after an LLC owner for his or her personal assets.

 

What is a Sole Proprietor Business?

A sole proprietorship is not incorporated, and therefore is the least costly and simplest business that you can start. When anyone operates a business on his or her own, he or she, by default, is considered a sole proprietor. 

A sole proprietor can operate under his or her name, or under a trade or brand name. Unlike an LLC, there is no separation between the business owner’s personal assets and the business. Therefore, you, as a sole proprietor, are personally liable for business debts that fall into default. If you cannot pay business debt, a creditor can go after a personal asset.

 

What Are the Main Differences of an LLC or Sole Proprietor Management Structure?

The following information enables you to explore the LLC or sole proprietor operations in connection with each entity’s formation, operations, taxes, legal safeguards, documents, and compliance.

#1 Formation

While you must file articles of organization in the state where you form an LLC, you do not have to file the articles as a sole proprietor. Both entities need to obtain permits or register a trade name, if applicable.

#2 Operations

The owners of an LLC either share in the decision-making process or appoint a manager to decide on operational matters. As a sole proprietor, you have the sole say in any decision. If you are a single-member LLC, then you, as the LLC member, will make any final decision.

#3 Taxes

LLCs enjoy pass-through taxation, and therefore owners report profits and losses on their personal tax forms. However, an LLC can also elect to establish corporate tax status. Like an LLC, a sole proprietor also enjoys pass-through taxation, and reports income and losses on his or her personal tax form.

The primary difference between an LLC and sole proprietorship is the tax flexibility. Only an LLC owner can elect how he or she wants to be taxed. An LLC owner can either choose pass-through taxation or choose an S-corporation or C-corporation tax status. 

An S-corporation is considered a pass-through tax entity while members of a C-corporation must pay business taxes. If it sets itself up as a C-corporation, an LLC must pay a corporate tax rate of 21% – due at the federal level.

Some LLCs choose a corporate tax election to save money. When an LLC is taxed as a corporation, for instance, the dividends it makes are normally taxed at a lower tax rate than what it receives in ordinary income. Also, the retained earnings a corporation makes are not subject to income taxation. When a corporate tax status is chosen, a business can take advantage of more tax credits and deductions.

#4 Legal Safeguards for LLCs

The owners of an LLC are not liable personally for any business debts. On the other hand, a sole proprietor is held personally liable for the business debts he or she acquires. Therefore, the LLC owner is personally protected in this respect.

#5 Documentation and Compliance

An LLC is usually responsible for paying taxes and renewing business licenses. In most states, the entity files an annual report. Attorneys advise that LLCs create an operating agreement so they know what to do in case of a dispute. The operating agreement does not have to be filed with the state when an LLC is formed.

LLCs, to fall in compliance, must hold member meetings and record the meetings and share activity. To stay in compliance legally, a sole proprietor must pay his or her taxes or renew licenses, when applicable.

 

What Happens Next?

Freelancers or business owners, just starting out, often debate on being an LLC or sole proprietor. Because a sole proprietorship is easy to set up, it makes it possible for freelancers or start-ups to begin operations immediately. 

However, as your business grows, you may need to change its status. A sole proprietorship simply does not offer any legal or financial protection for an owner. If you do not set up an LLC, you can end up becoming bankrupt – something you should avoid at all costs. 

Because an LLC offers more flexibility with regards to taxation and allows a small business person to keep personal assets safe, it is a popular business entity. You can learn more about this type of business entity and form one yourself. 

To begin the process, book or speak to us here: https://mollaeilaw.com/start. Make this your day to set yourself apart as a business and a professional firm. Review the benefits of establishing an LLC with a legal specialist – someone considered top in his field with respect to start-up formations and support.

What questions do you want to ask? How do you want to begin? By contacting a business attorney, you can get any doubts or questions resolved quickly and satisfactorily.