Sole Proprietorship vs LLC-Know the Difference
86When you're selecting the business structure for your small business, you'll need to know what the benefits and primary differences are. The entity for your business determines how you pay your taxes, and also the type of responsibilities under your wing if a situation of liability were to arise. Most business owners begin as sole proprietors, but can easily transition into an LLC structure for a variety of benefits. Industry liability is a key factor in the decision process; how much are you willing to be personally liable for, and how much would you rather have become a part of the business? When asking these questions, taking a look at the pros and cons of each type is a good way to learn more.
The advantages and disadvantages vary by the state you live in, so it's important to consult with an attorney or accountant about the specific privileges and conditions. Here's a look at the benefits of an LLC:
- Ongoing tax benefits as long as there is more than one member
- Personal protection from LLC liabilities and the LLC itself
- Ability to deduct 100% of health insurance premiums paid
- Self-employment tax is paid based on net income. The LLC will be taxed as either a sole proprietorship, a partnership or as a corporation by the IRS, depending on the LLC's tax structure.
Here's a look at the benefits of sole proprietorship:
- Filing taxes involves a simple self-employment income tax form
- No fees or registration requirements
- No payroll set-up
- Setting up a separate business account for accounting and tax purposes
You may want to transition to the LLC status after a period of sole proprietorship for a few key reasons. First, a sole proprietorship will make you personally liable for all debts and incidents that are a result of your company. This means that if the company goes bankrupt or incurs excessive debt, everything will show up on your personal credit report and records. An LLC would ‘file' these conditions independently, and not require you to pay back the debt from personal funds. It's important to remember that an LLC is considered a separate legal entity, and would generally assume these risks and assets.
A sole proprietorship also limits your ability to raise capital; most investors will make an attempt to learn more about your business if it has an LLC status. Business teams, lawyers, accountants, and other professionals in your industry will take your business more seriously if you have an established entity.
When it comes to taxes, however, a sole proprietorship still offers the most benefits. A sole proprietor reports all business profits on the Schedule C, and does not have to worry about complicated forms issued to corporations and other entities. By not having to worry about payroll and payroll taxes, you can also save on income taxes and keep the profit. Finally, healthcare reimbursement arrangements (HRAs) can be extended to your spouse, and then deducted for self-employment tax purposes as a reimbursement. This can offer significant tax savings in the long-term, but it's important that all healthcare plans are extended to all ‘employees' or family members.
Identifying the appropriate entity for your new startup is a necessary step as you grow and bring in revenue. Considering your tax opportunities, settling your liability clauses, and determining how you will manage health insurance benefits are all part of the decision-making process.
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I really like your way of explaining quite complicated legal and accounting terms. Very, very good!
Woot! You are smart and beautiful, Sabah! Keep up the hubs!
Good Hub, it helps new business owners. Thanks.
Very good Sound facts! Very much worth looking into. Now i can weigh my options more carefully! Thanks.
hi love it
Excellent information. It often suprises me how many people rush into an LLC or Corporation without considering a sole proprietorship. For business and accouting information from a CPA check out:
I am in Australia, so over the next 7 days I will work over all writings and see what is adaptable
If my friend above recommends you, then you are great
Thank you
Thank for the article. I am a aspiring entrepreneur and have been struggling with the decision about sole proprietorship of LLC. Your article was a great resource.
You're a wealth of knowledge so thanks for the information. Your writing style is fact based and you offer all options and alternatives. Keep it up.
Clear, concise, informative - great hub! Congrats.
Great stuff, I just changed recently to an LLC and it does offer significant advantages. Thanks for a great article!!
useful information.thanks
I am starting a division of cleaning services, from auto cleaning to residential and commerical cleaning. I never knew the advantages of an LLC. Now I know, and knowing is half the battle! Great post.
All your hubs have such great info. Thanks!
useful article, thanks
LLC - Limited Liability Company?
Good article. As someone who does taxes, go for the LLC or file as a Corp. Much better tax wise and protects you in the long run.
This is great info - we are in the process of moving from a sole proprietor to an LLC - your hub explains alot!
This has been great information as we are going from a sole proprietor to an LLC and this is just what we wanted to know
Thanks
Gaylene www.HyHazardperformance.com and www.greatmexicancuisine.com
Good information to know about.
Thanks! I chose to create the LLC. I know it costs more, but I wanted the protection from liability.
Still trying to decide which way to go - thanks for all the good info. I do think having protection is key .
Your information just cleared my doubts. Thanks!
Uh. What is LLC?
An LLC is a Limited Liability Company.
BTW, an exceptional explanation there Sabah! WTG!
it's so complicated. everyone looking into this should just freelance. it makes everything so much simpler.
Good job! I know there are probably a lot of people out there just starting or thinking about starting a business who could use this information. Thanks for sharing.
Joe
A very informative hub. I was wondering, can an LLC have it's own retirement plan such as a SEPP IRA?
I'm just getting started with my own small business venture, and this is one of the decisions that I've been working on. This helped me understand things a little better. Thanks!
For most people who do online businesses, they can operate fairly well as a sole proprietorship. Once you start making a significant ammount of money, the smart thing to do is incorporate so that you can get some of the tax benefits that come with having an S-Corp.
For most people who do online businesses, they can operate fairly well as a sole proprietorship. Once you start making a significant ammount of money, the smart thing to do is incorporate so that you can get some of the tax benefits that come with having an S-Corp.
Your hub is very informative. Selecting the right business entity from the start is important.
One disadvantage with a Sole Propreiter is several times suppliers won't set you up with an invoicing account without your SS#. Then if they decide FOB Dest means you pay the outrageous shipping fee they are trying to charge you...too bad, no arguing what Dest or Origin means..they can ruin your credit if you don't pay. With an LLC, no ones social is needed. If anyone has dealt with this, they know how prevalient getting ripped on shipping can be.
Very nice and useful information. Great hub!
Great hub. Thanks for sharing this information. It will be very useful!
Nice Hub Sabah!... you've simplified a complex topic for many ;-)
I am amazed at the difference in cost between states to set up an LLC. While some are quite cheap, others are rather expensive.
I am more aware now. This article is very informative, it will help a new bussiness man to select the right business entity from the begning. Is important to know about the cost involved in it.
good work done.
Thanks for the great information. I provided a link to this website on my blog. This is information they really need to know!
i am 24 years old and i am a carpenter and thinking of starting my own small business, llc or sole proprietorship? i woud like to hear a few different comments and suggestions from anyone please. this has been a decision i have been struggling with for a fe months. very informative article by the way!!!
For small operations, especially one-man-shows, S-Corporations are just about the best. You get the protection of a corporation and better tax breaks than regular corps and even sole proprietorships. Of course, for details, check with your CPA though.
Great description. Very clear for the layperson. Going to save for future reference. Thanks.
I own a small Real Estate Company in Atlanta Ga. I used to make six figures, and due the the mortgage mess, it dwindled down to $80k, $60K, $17K, and I'll be luck if I finish out this year with $10k. I dwindled down to only one agant. Should I keep my S-Corp, or go LLC? MrHarbert@yahoo.com
how are you?where are you from?
Something not mentioned here that I learned recently is that if you own an LLC but you put ANY personal money into it directly you could lose all of your liability protection. Just keep this in mind as you consider your options.
beauty+brains = may I have ur #? *just kidding* I'm not in Florida.
NIce job!
Hopefully someone can answer this. We live in Ohio. I have a full time job. My wife has an opportunity to get some contract work (part-time) as an independent contractor. From what I've read, it seems that the sole proprietorship instead of an LLC is the way for us to go instead of the LLC as this is simply some "side" income. Am I thinking correctly or is there other elements I could consider?
Very nice and simple explanation. I will consider converting into LLC...
Single member LLC is essentially a sole propriator under federal law
Guees im not the only one needing more information about this decision. Good thing we are all go-getters and found a good piece of advice!
It would've been a really good idea for me to have checked this article out two years ago (I went with an LLC and should've done a sole proprietorship. Now that I'm in the process of having to renew, I have a lot more to work with. Great info and very easy to understand. Thanks!
Very good explanation. Clear and concise. Thanks for your help in making the decision.
I Googled the difference and found this right on top, very informative. Never knew that LLC could have so much more benefits than sole proprietorship. Thank you.
Also note that an LLC does not neccessarily protect you from liability as a person. For example, being a physician and having an LLC, a patient with a grievance can sue the LLC and you personally for negligence and malpractice.
Good information about the difference between sole proprietorship and LLC. I think Phil's comment as well is also something to keep in mind when deciding the structure of your new company.
I'm just starting and reading this have put me at least in the ball park
thanx
excellent and clear explanation that helped me make a decision - nicely done!!!
Great information! I am looking to start a small business and this helped to explain the difference! Thanks!
Need internet marketing information? http://Amanda-Marie.com
Having an LLC or working as a sole-proprietor is exactly the same if you are a single-member LLC. I don't see any reason not to become an LLC, except that it costs a few dollars to get registered, but it will be worth it for the protection and professionalism. Also, if you elect to be treated as a separate entity from your LLC for tax purposes (S or C corp) you can get away from the self employment tax for some of your earnings. It becomes a bit more complicated, but it can be worth it.
I like to say thank you for explaining things in simple terms.
I am a small clothing retail business owner, and I operate under Sole Proprietor. I've read most of the Q&A, however, I am still slightly confused with replies. I operate my business only on weekends, and work FT. Is it more beneficial for me "tax wise" to continue to operate as "SP" or should I change to LLC for tax purposes? I operate in a small flea market space.
started an LLC ( an investment company) that has three properties. I am the only member. How do I sell it?
I have a buyer but am not sure what paperwork we have to file, if any...
useful information. Thaks for share...
Although LLC seems like it covers you completely, you still need to get some sort of business insurance as you will never be completely covered from personal assets,If you were to be sued for any reason. Liability Insurance can also be purchased if you are a sole proprietor to cover your personal property and assets.
I am thinking about starting an online scrapbook/stamp supply shop. Small small small --I am starting small & will always be small --I don't have the room nor the hours in the day to every become big (I work full time so this will be a side venture). My accountant suggested LLC, but I still don't know which to do.....does size matter? I don't see every having an issue with liability or anyone suing me ----we're talking about inks & paper!
I have a small business with very low chance of liability. The sole proprietorship has worked out well for me so far. I am not bogged down with a ton of paperwork during tax season. My profits appear as regular income and are added to the income of my "real" job. At this point, it seems like an LLC or S-corp would be a lot more hassle than it is worth.
"A sole proprietor reports all business profits on the Schedule C, and does not have to worry about complicated forms issued to corporations and other entities. By not having to worry about payroll and payroll taxes, you can also save on income taxes and keep the profit."
You do have to worry about payroll taxes. You still pay the full 15+% whether you are an LLC or Sole Proprietor. People may be getting by if their Schedule C is for a very small amount... but if it's not and you get audited you have a whole lot of hurt coming your way.
The only way to avoid SOME Payroll taxes is to Incorporate as a Sub S and pay yourself a salary. Then the remaining income above your salary flows through at the end of the year and is subject only to State and Local Taxes.
One way or the other the Feds are going to get the money out of you!
Please understand that there is no need to "set-up" a sole proprietorship, it is a default business entity. The moment that you decide to start a business for profit you have also started a sole proprietorship, without any type of filing necessary and if you have done so with another individual then you have started a default business entity called a partnership. The are no formalities involved with either entity. Also neither of these entities is recommended by the majority of business, or tax attorneys.
A LLC, C-Corp, or S-Corp is recommended instead of a sole-proprietorship.
Hi, I started a corporation in 1976 and used it for about 10 years. I still have a post office box in Media Pa. USA in its name and the car I drive in its name. I have kept no paper work up for the last twenty years, can I go back and get it running again?
Ihave registered my DBA with the local county. Initially the small busniess will be an on-line order. Once the income flow and profits allow, I will buy product for a Kiosk at a local mall, while retaining the Web site going. It is a sole proprietorship (SP)and my question is if for some unexpected reason I fall into a place where I find myself with a liability claim, would only "MY" assets be at perrill, or, would my spouse's assets be included? Everything we own is in her name; house, car, and we don't own property, thus, I would think the only recuperable assets would be those in my name only...could you please advise?
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The problem is that our State allows Single Member LLCs. In this case, I can choose to treated as a sole proprietorship for tax purposes and just pay self-employment tax and income tax on profit of the LLC. That means I can just withdraw money from the business directly to pay myself. However, now confusion arises when it comes to responsibility of the LLC and the liabilities. Am I now fully responsible for liabilities of the LLC? Can business debtors now take away my personal property like my house? If so, doesn't that defeat the purpose of setting up the LLC? Thanks for any explanation!
Nice cool dodo
hedgeek 4 years ago
Do you recommend an attorney handles converting a sole proprietorship to an LLC or is this something that can be handled easily by a small buisness owner?