New businesses are mushrooming all over the US at a lightning pace. In fact, 1.36 million new businesses were registered in Q1 of 2021 itself.
If you too are contemplating launching a business, hold that thought. Have you thought about the kind of business structure you want?
Then, be prepared to pay for that oversight. Business structure is an aspect that can impact your management, operations, taxation, and ownership.
If you aren’t clear about whether your new business should be a Sole Proprietorship, Partnership, Corporation, or LLC, that’s bad news. Understand that it’s not easy to switch entity types once a business is formed and filed.
However, there’s no need to panic. We have your back. In this post, you will learn the basics of LLCs and Sole Proprietorships so that you are better positioned to take an informed decision on which one to choose.
Let’s dive in.
The formation process of a business is dictated by the entity structure of the business.
Sole Proprietorships are easy to start, especially when they are formed under the owner’s name. In case they are to be run under a fictitious name, a Doing Business As or DBA has to be filed with the Secretary of State.
LLCs have a longer road to cover before they come to life. They have to first file Articles of Organization with detailed information about their founding members. Following that, they have to draft an LLC Operating Agreement that outlines each member’s roles and responsibilities.
Both LLCs and Sole Proprietorships offer pass-through taxation.
What does that mean?
It means that business income passes to the business owners. Consequently, you don’t have to pay double tax — one on personal income and one on business income.
However, there’s a downside to this taxation system. Sole proprietors are required to pay a self-employment tax to the US federal government.
LLCs, on the other hand, can forgo this tax if they opt to be taxed as a corporation. However, then they would have to pay some corporate tax for their business.
Sole Proprietorships belong to their owners, who should be individuals.
LLCs are formed by groups of one or more entities or individuals, termed as Members. The LLC belongs to all members collectively. Banks and other financial institutions can’t be counted as members but foreign businesses and other LLCs can.
Over to You
Now you know the basic differences and similarities between LLCs and Sole Proprietorships. However, you might need more information before you’re ready to take a call on what kind of business structure you should make.
To simplify your research, we’re sharing an infographic on the topic, created by GovDocFiling. Take a look at it.
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.