9 Powerful Reasons Why LLC is Better Than Sole Proprietorship

As a brand new entrepreneur ready to face the world, you are going to find yourself going head-to-head with a lot of challenging decisions.

One of the most challenging question you’re going to face is whether you should start your business as a sole proprietorship or LLC

This is a question I hear quite a LOT as a business lawyer.

It’s a hot topic because, and entrepreneur, like you, should get the right information to make the smart decision.

In summary, sole proprietorship is the simplest business entity, but it requires that you take personal responsibility for all business matters.

On the other hand, LLC protects your personal assets from business debts and lawsuits. What this means is that if something happens to your business then your personal assets such as personal bank account, car, and home will be protected.

The first thing successful entrepreneurs do is form an LLC and as a Business Lawyer for Entrepreneurs, I highly recommend having a registered LLC before you start your business.

If you’re still not sure about whether LLC is right for you, email me at sam@mollaeilaw.com with some information about the business you’re looking to start and I will tell you whether LLC is the right choice for you.

 

Sole Proprietorship vs LLC

If you are trying to choose between a sole proprietorship vs LLC, there are several factors to be consider…

When trying to decide between sole proprietorship and LLC, it helps to look at the main benefits and drawbacks of each option.

First, you want to compare the cost and the ease of creation.

In the U.S., becoming a sole proprietorship is extremely popular because it is the easiest business entity to create. By comparison, the sole proprietorship is far less complicated than the LLC.

A sole proprietorship does not require nearly as much paperwork, and it is cheaper as well. Establishing an LLC means more paperwork, more money, and more hoops to jump through.

A sole proprietor will have to use their own resources in order to raise capital for the business. The perk to being an LLC is you team up with the other owners of your company in order to come up with the funding needed to raise the business – together.

Unless you have a strong credit line and/or a lot of money, a sole proprietorship could end up being costlier in terms of capital.

Choosing to be a sole proprietorship or an LLC is also a matter of whether or not you want to be your own boss. As an LLC, you are going to have other people working with you to make decisions about your business.

As a sole proprietorship, you are going to be your own boss. You can make all of your own decisions about your company and you do not have to worry about getting the input or approval of anyone else.

Being the only one who makes decisions, however, could just make it harder to make decisions. So, you really have to think about whether or not you want to run the business by yourself or with a team of people.

As a sole proprietorship, you are going to have some issues with liability. This is because your personal assets and your business assets become lopped together as one.

Basically, this means if you are the owner of a grocery store and someone slips and falls in your grocery store, they can come after both your personal and business assets if they decided to sue you.

An LLC, on the other hand, provides you with some liability protection. Your personal assets will no longer be at risk if you run into any legal problems.

 

Should I Start a Sole Proprietorship or LLC

The easiest way to answer the question regarding whether you should start an LLC or a sole proprietorship is to look at some of the big pros and cons of each option.

A sole proprietorship, for example, is one of the easiest business entities you can launch. Basically, you just get to jump right in with both feet and start working.

As a sole proprietorship, you are technically the business. This, however, does mean all of your business profits and losses will be factored into your individual taxes. With an LLC, you can sometimes avoid this issue.

The biggest downside to going with sole proprietorship is the fact that you have absolutely no protection. If someone decides to come after you, they can take your business, your house, your car, and all of your money.

By comparison, the biggest benefit to making your business an LLC is the protection from liability that you do not get if you opt for the sole proprietorship. As an LLC, someone is only going to be able to sue the business itself for damage. They can go over the business assets, but they cannot go after you.

One of the main disadvantages is setting up your business as an LLC isn’t nearly as simple as sole proprietorship. You have to file documents and complete paperwork – all of which includes filing fees. Basically, you have to jump through a few hoops before you can dive in and start working.

When you’re deciding whether to start a sole proprietorship or LLC, it really comes down to your personal situation. I can help you make that decision if you email me at sam@mollaeilaw.com

 

Sole Proprietorship Definition

A sole proprietorship is the simplest type of business and it allows a single person to form and operate the business 

As a sole proprietorship, you are not a legal entity. This term just lets people know that you are a person who is the owner of a business. This term also makes it clear that you are legally responsible for the business.

 

What is a Sole Proprietor?

A sole proprietor is a fancy term for business owner.

In a sole proprietorship, you and the business are the same. This is someone who more or less is the business they own. While you are not a legal entity, you are legally responsible for your business.

 

Advantage of Sole Proprietorship

Naturally, there are a lot of benefits to sole proprietorship including:

  • You are always in control of business decisions
  • You are in control of sales and transfers
  • You don’t have to deal with corporate tax payments
  • It is an inexpensive business entity
  • There are very few requirements
  • Can be formed instantly and with minimal paperwork
  • They do not require state paperwork, ongoing formalities, or a separate tax filing
  • You can legally mix business and personal assets

You may have one or more of the above reasons for wanting to start a sole proprietorship. Weigh the pros and cons carefully and feel free to email me at sam@mollaeilaw.com to discuss your unique situation.

 

Disadvantage of Sole Proprietorship

One of the biggest downsides to sole proprietorship – and ultimately the reason why a lot of people decide against it – is because you have no liability protection.

There is no separation between your personal assets and your business assets. With an LLC, you do not have to worry about someone coming after your personal assets.

While being in charge of the decisions is a good thing, it can also be a bad thing. In a sole proprietorship, you are responsible for everything. There isn’t someone on top of you making the decisions for you. You are the big boss that the employees may or may not like.

Some of the other disadvantages of sole proprietorship include:

  • Difficulty obtaining capital
  • Existence ends with owner’s existence – no business is left to other generations
  • Can only have one owner

 

How to Start a Sole Proprietorship

To start a sole proprietorship, you don’t have to do anything formal or legal at the local, state, or federal level. You just name your business and get to work.

A sole proprietorship is a business ran by a single individual. The key difference between a sole proprietorship and other business entities is the fact that you do not have to register your business with the state.

Because it is so affordable and easy to set up, this is one of the more commonly formed businesses. Furthermore, you can always start out as a sole proprietorship and then upgrade to an LLC or a corporation at a later time.

This is not a decision you have to make and live with for the rest of your life. You are entitled to change your mind.

There are no formal or legal steps to becoming a sole proprietorship, but you may have to register for a business license or some sort of permit in order to be a business.

This is something you are going to figure out by checking your local laws – or talking to a business lawyer.

Naturally, you are going to need to give your business a name. The most important thing you can remember is not to name your business the same name as some other business.

This could land you in legal trouble. At the very least, it could result in people coming to your business thinking it was the other business with the same name.

There are no legal or formal steps needed at the local, state, or federal level. It’s easy to start up and run year after year. Some individuals apply for an EIN number to identify their business instead of using their social security number, but it isn’t required.

 

Financial Structure of a Sole Proprietorship

The financial structure of a sole proprietorship is simple – you just keep your business finances and records separate from your personal ones. This includes opening business bank accounts and credit cards.

After establishing a sole proprietorship, you will need to make sure your personal and business finances are separate. This is going to make it easier to file taxes and to figure out whether your business is making or losing money.

Ideally, you should set up a business bank account that is only to be used for business purposes. You should set up a business credit card that is only for business expenses. And, you should acquire record keeping software you can use to simplify your business records.

Separating your personal finances from your business finances is largely about the IRS, you need to demonstrate you are conducting a business with the intention of making some form of profit. Things can get a little hairy if you start to mix your personal and business finances together.

It is important to note that with a sole proprietorship, you don’t legally have to separate your finances. It is recommended but not required.

The other key aspect to keep in mind is taxes. You are going to have to file your taxes a certain way because you have to file both your personal and business taxes.

Ideally, you should reach out to a tax expert to help you file your taxes the right way. Hiring a tax consultant is in the best interest of your business and yourself as you do not want the IRS coming after you – or your business – because you made a mistake on your taxes.

 

What is an LLC

An LLC is a limited liability company.

A limited liability company (or LLC) is basically the happy middle between a sole proprietorship and a corporation. You get some of the benefits and protections of a corporation while avoiding some of the downsides of a sole proprietorship.

LLC’s are simpler and cheaper structures for taxation purposes. LLC has “pass-through” taxation, which means their earnings just pass through to the personal income taxes of their members. This means accountants don’t have to file a separate tax form for the company, and file much simpler forms than for corporations, which also saves on costs.

I recommend LLCs for companies who expect to grow organically and not seek fundraising to scale. If you sell services (e-commerce, consulting, design, developers) I recommend forming an LLC.

Advantages of LLC

Most would agree the benefits of forming an LLC tend to outweigh the downsides associated with forming a partnership or a sole proprietorship.

Some of the LLC advantages can offer include:

  • Asset protection: As an LLC, you do not have to worry about your personal assets getting attacked if your business runs into legal trouble. Sole proprietorship does not offer this type of protection.
  • Pass-through taxation: As an LLC, you will not pay business taxes. This is because the income taxes are passed to the owners and have to be reported on the owner’s business taxes.
  • Limited requirements: Compared to corporations, there are not as many compliance requirements your business will have to meet in order to be an LLC.
  • Credibility: Having LLC tacked to the end of your business name is just going to make you look like a more credible business. Potential customers, employees, and investors are all going to feel as though they can trust you as opposed to someone without the LLC at the end.
  • Flexible Management: With sole proprietorship, there is one person in charge. With an LLC, there is a little more flexibility to set up a system for who is in charge and who makes decisions. For some, this is more appealing than having to make every single decision by yourself.

If you’d like to discuss how the advantages of an LLC apply to your unique situation, email me at sam@mollaeilaw.com today.

Disadvantages of LLC

One of the biggest disadvantages with forming an LLC (instead of a sole proprietorship) is the expenses associated with filing the necessary paperwork.

To make things worse, a lot of states will include ongoing fees that you will have to continue to pay because your business is an LLC. Some business owners end up more swayed toward forming a sole proprietorship because they can’t afford the constant fees.

It is also harder to sell or transfer the ownership of an LLC. This is because an LLC usually has shareholders and several different people owning the business. The bottom line being you can’t sell what isn’t 100 percent yours.

LLC is considered a newer type of business entity. As such, there isn’t a lot of case law in place to use as a reference when legal matters arise.

 

How to Start an LLC

To start an LLC, you need to name your business, file the paperwork and pay the fees, and create an LLC operation agreement.

If you’d like to get help with forming your LLC, email me at sam@mollaeilaw.com

The fact that one of the advantages of forming a sole proprietorship is that it is super easy results in some people thinking forming an LLC is not so easy. The problem with this line of thinking is the process isn’t as complicated as people think it is. In fact, if you follow these steps it is pretty easy too.

First, you need to choose a business name. The name has to comply with the LLC rules of your state. Obviously, you also need to make sure you are choosing a name that does not belong to another business.

Next, you have to file all of the formal paperwork. It is not uncommon for you to pay anywhere from $100 to $1,000 filing all of the necessary paperwork depending on your state rules.

Third, you have to draw up an LLC operating agreement. It may actually be helpful to have a lawyer assist in creating this document. This document will lay out all of the responsibilities and rights of all the members of the LLC. This document is basically the backbone of the company.

Depending on where you live, you may be required to publish a notice saying that you intend to form an LLC. Keep in mind, this is only required in a handful of states.

The last step isn’t directly related to an LLC, but you will need to obtain the licenses and permits required to operate whatever type of business it is that you plan to start.

When you’re ready to start your LLC, I can help you make sure everything is legal and compliant. Email me at sam@mollaeilaw.com today to get started.

 

Difference Between Sole Proprietorship and LLC

The difference between sole proprietorship and LLC honestly comes down to one major thing: liability.

Sure, there are other things such as taxes and fees, but liability is the only real difference between sole proprietorship and LLC.

It is the protection an LLC business is offered that a sole proprietorship is not that makes the difference. The question being – do you want to put your business or personal assets at risk if something were to go wrong?

 

Is a Single Member LLC the Same as a Sole Proprietorship?

A single member LLC is not the same as a sole proprietorship.

A sole proprietorship doesn’t offer the same protections as an LLC.

Even though a single member LLC and sole proprietorship will only have you as the owner and member, as long as you keep your business finances and assets separate from your personal ones, your single member LLC will protect you.

 

Sole Proprietorship vs Single Member LLC

A sole proprietorship vs single member LLC look very similar.

The biggest similarity when comparing a sole proprietorship and LLC is that both formations have only one owner and member – you.

You should check with your state to determine if a single member LLC is allowed in your state. If it is, and you’re ready to form a single member LLC, email me at sam@mollaeilaw.com and I can walk you through the process.

 

Can a Sole Proprietorship be an LLC

Yes, a sole proprietorship can be an LLC.

You simply file the appropriate paperwork and pay the filing fees to transform your sole proprietorship into an LLC. Once your LLC is formed, you should keep your business and personal finances separate and meet the requirements to stay compliant each year.

 

Convert Sole Proprietorship to LLC

To convert a sole proprietorship to LLC, you should file the paperwork and pay the fees to start an LLC.

Once you’ve filed the paperwork and paid the required fees, your application will be approved and you will officially be an LLC. Yes, it is really that easy!

If you are ready to convert sole proprietorship to LLC for your business, email me at sam@mollaeilaw.com today.

 

Sole Proprietorship vs LLC Taxes

When it comes to sole proprietorship vs LLC taxes, not much changes. The IRS doesn’t see the LLC as a separate business entity so an LLC passes its profits to the owners who file personal income taxes.

The same is true for a sole proprietorship. The two types file taxes exactly the same way, with the only difference being an LLC usually has multiple members who share the profit/loss and expenses of the business.

The only situation in which your LLC taxes will be different than taxes as a sole proprietorship is if you choose to have your LLC taxed as a corporation.

 

Tax Benefits of Sole Proprietorship vs LLC

The tax benefits of sole proprietorship vs LLC are actually the same because both formations are pass through entities in which the business income and expenses pass through to the owner(s).

With an LLC, you typically have more than one owner who will share the income and expenses of the business, but not always.

Both formations offer the separation of your personal and business finances, but only an LLC actually protects your personal assets in the event something should go wrong with your business.

You’ll file taxes the same way with both a sole proprietorship and LLC, so really the only advantage is that limited liability protection an LLC offers that a sole proprietorship doesn’t.

 

Sole Proprietorship vs LLC California

Deciding between a sole proprietorship vs LLC California is a personal decision that only you can make, but California does make it easy.

To form an LLC in California, you simply name your business, file the appropriate paperwork, and pay the fees. For California, you will pay an $800 annual franchise tax as well as initial filing fees.

For a sole proprietorship, there are no fees or formal filings needed.

 

Sole Proprietorship vs DBA

When comparing a sole proprietorship vs DBA, it’s important to recognize that a sole proprietorship is a type of business formation whereas a DBA is more like a title.

DBA, or doing business as, just lets the business operate under a different name. Any type of business entity can file one or more DBAs to use a different name than their legal registered business name to do business.

With a sole proprietorship, legally, your business if your legal given name. If you’d like to operate a business with any other name other than your name, you should file a DBA.

If you don’t file a DBA and collect money under any name other than your own, you may face fines and penalties.

Filing a DBA is easy, and I can help you get this completed in just one day. Email me at sam@mollaeilaw.com today to get started.

 

Conclusion

Choosing between an LLC and a sole proprietorship is a difficult and important decision because you don’t want to make a mistake.

The thing is, you don’t have to decided alone. And once you do make that decision, you have the ability to change your mind. Your sole proprietorship can become an LLC at any time.

My job is to make this process easier and less stressful so you can focus on other business activities. I can help you make this decision as well as take the important legal steps to form your business properly.

I’m just an email away, so don’t be afraid to reach out.

Email me at sam@mollaeilaw.com to get started with your LLC