In 2020, there were 4.4 million new applications to set up businesses in the US. Each one of them had one common decision to make — which business structure is the best?
For entrepreneurs, this is one of the most important decisions because it impacts tax structure, management, operational processes, and more.
Out of all the business entity types out there, Sole Proprietorships and LLCs are the most preferred choices. In this post, we’ll discuss how these two structures differ.
Before you make the final choice between the two, make sure you understand the pros and cons of each business structure.
Sole Proprietorship vs. LLC: Ownership Arrangement
All Sole Proprietorships are run and owned by a single person. On the other hand, multiple people can start and run an LLC.
All the LLC owners are referred to as members. They can be foreign entities, individuals, or even other LLCs. However, insurance companies and banks can not become LLC members.
Sole Proprietorship vs. LLC: Formation Requirements
Compared to all the other entity types, a Sole Proprietorship is the easiest to establish. If the owner decides to run the Sole Proprietorship under their own name, there are no additional requirements. To run it under a fictitious name, it is necessary to file for a DBA (Doing Business As) in your state. You will need to file a special filing fee to get your DBA.
In contrast, LLC formation makes it necessary for you to file Articles of Organization. You’ll need to do the filing with the Secretary of State. Additionally, it is necessary to create an Operating Agreement for your LLC. It should define the responsibilities and roles of each manager and member.
As an LLC owner, you will be required to pay a state filing fee as well. Across states, it can vary between $50 to $500. Plus, you will have to pay annual filing fees as well in most states.
Sole Proprietorship vs. LLC: Tax Implications
In a Sole Proprietorship, the owner is required to report the overall business income on their personal tax return. It’s a pass-through taxation system. Due to this, the owners of a Sole Proprietorship are also required to pay a separate self-employment tax.
All the profits and losses of the LLC also pass through to the personal tax return of each LLC member. If you want, you can choose to get your LLC taxed like a Corporation instead.
Whether you choose to form an LLC or a Sole Proprietorship, make sure that you finish all the legal formalities correctly. For more information on how LLCs and Sole Proprietorships differ, please check out the infographic below by GovDocFiling.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
