Here are some important factors to consider when assessing the main pros and cons of a sole proprietorship versus an LLC. The Small Business Administration provides general information about starting and managing your new business at www.
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What would you like to name your LLC? Need time on your business name? Start now and decide later. Ease and Costs of Formation. In the United States, a sole proprietorship is the most popular business entity because it is the easiest to form.
Compared to an LLC, a sole proprietorship is less complex and less expensive and demands less paperwork to start. You can serve as your own agent, but many businesses elect to have a professional service handle this role instead.
Maintaining a compliant sole proprietorship is incredibly easy. The only other significant requirement is renewing your business licenses as needed. The requirements to maintain an LLC are much more complex than a sole proprietorship.
LLCs in the vast majority of states are required to file an annual report, which essentially informs the state of your business activities for the year. For example, the LLC annual report usually includes information about your registered agent, ownership group, and business location.
Similarly, if you change some of your business policies, you should amend your operating agreement to reflect that change. As a sole proprietorship, your requirements to operate a compliant business are fairly minimal. Usually, if you pay your taxes and maintain the appropriate licenses, your business is compliant. Each state has its own statutes and laws that can give you a picture of the legal requirements for LLCs, which are far more extensive than the requirements for sole proprietorships.
LLCs also need to file annual reports, obtain licenses and keep them up to date, and more. LLCs with employees are legally required to obtain certain types of insurance. Fundraising as a sole proprietorship can be difficult. For one thing, most external investors are hesitant to send funds to an individual person. Your business cannot issue stocks or bonds, either, which limits your fundraising options.
Your best option for getting funds from an external source is probably to obtain a personal bank loan. However, you should keep in mind that your business and personal finances are linked; if you have a poor credit score, a bank may decline your application. Since LLCs are formal business entities, they have more options for fundraising.
Of course, an LLC cannot sell stock, but it can offer other securities, like bonds or membership units. Still, private investors typically do not like investing in pass-through entities like LLCs, as corporations are strongly preferred for a number of reasons. One major advantage of the LLC in this area is the fact that, as a formal business entity, the LLC can apply for business loans. Considering that the sole proprietorship is only eligible for personal loans, this is a significant edge for LLCs.
As a sole proprietor, you will not pay any business income taxes. Instead, your business income tax will be reported on your personal tax return. That said, you are responsible to pay self-employment tax, which is a You are entitled to all of the profits, along with all of the debts and obligations.
You can even be held responsible for liabilities caused by your employees. Sole proprietors don't have to worry about mixing business and personal accounts from a legal standpoint. In the eyes of the law, they're regarded as one and the same.
However, the practice is still discouraged by most experts. In an LLC, you must be careful to keep banking records and funds separate from your own personal records and funds. Violating this rule can result in the loss of your limited liability protection. Registering your LLC does give your name protection within your state. Sole proprietors don't face the same requirements. However, if the business owner plans on operating under a company name, instead of under their own name, they will need to register for a "fictitious business name," or DBA "doing business as" , in their home state.
By default, all profits made by an LLC are only taxed once. This is known as pass-through taxation. As the owner, the tax liability belongs to you and passes through to your personal tax return.
To file taxes, you report your operating results, including profit or loss, by submitting Profit or Loss From Business Sole Proprietorship Form , Schedule C with your personal tax return. An LLC is very flexible and can also be taxed as a sole proprietorship, a partnership, or a corporation. A sole proprietor also benefits from pass-through taxation, so you'll report your business's income or loss in the same way. The difference is that you don't have the option to file as a corporation.
You're also not required to pay taxes on the full amount of your sole proprietorship's income. Instead, you'll only pay taxes on the profit of your business. Forming an LLC requires you to file articles of organization, sometimes called a certificate of organization, with the state.
Requirements vary by state. Typically, an LLC operating agreement is drawn up to document the members' and managers' rights and duties. LLCs also have to file annual or periodic reports and pay a required filing fee in most states.
Unlike an LLC, no formal action is required to form your sole proprietorship if you are operating under your own name. If you want to use a different name, you will need to file for a DBA.
You may also need to acquire any mandatory licenses or permits, and these requirements vary by region, state, and industry. Whether you're looking for the liability protection and flexibility of an LLC or the less formal, unlimited control of a sole proprietorship, now you have the tools to make a more informed decision for your business and your future. LegalZoom can help you start an LLC quickly and easily.
Get started by answering a few simple questions. We'll assemble your documents and file them directly with the Secretary of State.
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