You’re ready to start a business and your name and now it’s time to file your business. Do you go with an Limited Liability Company (LLC) or a Sole Proprietorship? For those who haven’t gone to law school, the legal details one way or the other can be incredibly overwhelming!
Limited Liability Company (LLC)
The primary benefit of an LLC is the protection of your personal assets that it provides. If anything were to happen to the business, you file bankruptcy or undergo a lawsuit, authorities wouldn’t be able to access your personal assets, only the business assets.
To set up an LLC, you have to pay for filing with your state, each of which have different rules and regulations that include annual fees, operating agreements or registered agents. This adds some addition cost and time to setting up and managing your business. When you file taxes, you also have the option to file as a sole proprietorship, partnership, S Corp or C Corp. Each of these have different tax implications based on how many people you have in your business.
- Pro: Protection of your personal assets
- Con: Separate bank account and entity required
- Pro: Additional tax benefits
- Con: Upfront and ongoing fees and maintenance
One of the major benefits of having a sole proprietorship is that you don’t have to do anything to get setup. Just start working, and you’re good to go! You can use your personal bank accounts to manage your income, and you only have to file one return when it comes time for taxes. If you do want to manage your sole proprietorship under a different name, you just file a Doing Business As (DBA) for your legal records and filings.
When it comes to taking out any loans for your business, they will be taken out against your personal financial background as opposed to a separate business entity. Your personal assets would also be liable if your business was sued, went bankrupt or any other potential challenge.
- Pro: No setup filings or costs, just start working
- Con: Lots of personal liability
- Pro: Use your personal bank account to handle your funds
- Con: Need amendments for additional employees or owners
Which one is right for you?
While at first glance an LLC and a Sole Proprietorship are incredibly similar, and in reality, they are in many ways. But, depending on how you want to elect an LLC for your tax filings, how many owners or employees you have or what type of liability your business may have, you’d be better off with one or the other.
For example, if you’re going to need to take out loans and eventually hire employees, you may be better off with an LLC. If it’s just you as part of the business or you aren’t in a high-risk market, you may be better off foregoing the costs of filings and additional requirements and just having a sole proprietorship.
If you’re still unsure which option is right for you, try consulting your CPA and they should be able to advise you on which option is best for you.