Updated: Jan 23, 2021
The decision to set-up your business as a Sole Proprietor or a LLC your business can be a very important choice. For this article we (Community Tax Agency) wanted to talk about the difference between a limited liability company or LLC vs. the sole proprietorship.
We understand that this is an important step during your entrepreneurship journey and we are committed to offering you the best information so you can make an informed decision.
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Limited Liability Company Versus a Sole Proprietorship
One of the key differences of LLC versus sole proprietorship is that a businesses 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.
For example, creditors can go after a sole proprietor’s home, car and other personal property to satisfy debts, while an LLC can protect your personal assets.
A Sole Proprietorship: What to Consider
No required paperwork apart from industry-specific licenses
No annual state filings
You are only responsible for personal federal, state, local self employment tax and FICA taxes
There is no liability protection for you, which puts your personal assets at risk
Difficult to obtain funding
Tough to build business credit
Limited Liability Corporation: What to Consider
More market credibility
Liability protection against lawsuits, commercial debts, keeping your personal assets safe
Slightly easier to obtain financing
Plenty of paperwork
Annual state filings
Additional taxes to pay
Sole Proprietorships vs. LLC: Key Differences
Forming a Sole Proprietorship vs. LLC
Forming a sole proprietorship can be as simple as getting to work. Depending on what kind of work you do, you may have to obtain licenses, permits, zoning clearances, or other permissions from your local government. If you so desire, you can form a legal entity and file an assumed business name, and to make tax season more bearable, obtain an EIN (employer identification number) if you have any employees.
Forming an LLC is a little more involved, but still a relatively simple process. You’ll need to name your LLC, and be sure to check your proposed name before going to file; you’ll want to be sure you’re choosing a name unique to your business. There are several more steps to this process we would be happy to discuss with you here.
Taxes for a Sole Proprietorship vs. LLC
If you have a sole proprietorship or LLC, there will be changes in your taxes. The most important thing when you start out is to separate your personal and business finances and get your documents in order and on hand. This includes personal tax returns and other income tax documentation, and information on any debts you may carry.
As a sole proprietor, you may qualify for filing pass-through taxation, which can save you a bit when it comes to pay self-employment tax. Your tax rate can vary depending on your business type, so keeping the proper NAICS code on hand is also vital. Not sure what this is click here we need to talk.
Having the proper documentation regarding your profits and losses, payroll taxes, and any forms regarding real estate owned by your entity will be vital. Be prepared. As an LLC owner, your business will not pay taxes itself, but the profits and losses will be listed on your personal tax return, but having proper division of finances will do you well in the long run.
Personal Liability For a Sole Proprietorship vs. LLC
As a new business, legal protection can be important to your well-being and the longevity of your endeavor. Filing an LLC can protect you personally from business liability. Consider the nature of your business and what is at risk.
A limited liability company does just that; it limits your liability. As an owner of an LLC, you will not be personally liable for the company’s debts or liability. The same cannot be said for a sole proprietorship. As a sole proprietorship, you would be personally responsible for the debts incurred by your business.
Here at Community Tax Agency we are all about everything that affects the financial state of your business. This included making such an important decision as the best way to register your business. We are here to help you not only with the foundation of your business's foundations but to keep things on track all along the way.