Let’s face it—choosing between Sole Proprietorships and LLCs is a task. The two business structures are so similar yet different that any new entrepreneur is bound to get confused between the two.
This choice is an important one as the business structure you choose will directly affect your business. It can put you ahead of (or behind) your competitors.
So, how can you figure out which one’s the right structure for you?
To help you choose, we’ve put together this detailed guide.
1. Forming the Busines
Sole Proprietorships are easy to form and run. You can easily start running a Sole Proprietorship under your name. If you’d like a different name for it, you can always get a fictitious name by applying for a DBA (Doing Business As).
LLCs, on the other hand, would require you to file your Articles of Organization with the Secretary of State. You also need to create your LLC Operating Agreement and pay the state filing fees.
LLCs and Sole Proprietorships are taxed in a similar manner. They both offer pass-through taxation that lets the income of the business flow through to the owner’s personal income tax return. This means that you’ll be saved from double taxation.
In either case, you’d have to pay a huge self-employment tax.
LLCs, however, can avoid this tax by choosing to get taxed as an S-Corporation. In this case, the owners will be treated as employees and will only be taxed on their income. However, you’d be required to pay a separate corporate tax for the business.
3. Ownership of the Business
LLCs have a flexible ownership structure in the sense that you can have both individual and business owners. Members of an LLC can be other LLCs and foreign entities as well.
Sole Proprietorships have more rigid structures. They can only have a single owner who has to be an individual.
While these similarities and differences should give you some insight into the two business structures, there’s a lot more to learn. To find out all about Sole Proprietorships and LLCs, take a look at the below infographic by GovDocFiling.