As an entrepreneur, one of the biggest decisions you’ll make is what kind of corporate structure you want for your business. The choice you make will impact your ownership structure, taxation arrangement, and more.
Out of all the options available, Sole Proprietorships and Limited Liability Companies (LLCs) are the most popular picks for entrepreneurs.
There is a reason for this:
Both structures offer multiple advantages. In this post, we’ll take a look at all of the pros of Sole Proprietorships and LLCs.
We’ll also discuss their similarities and differences, so you get a more balanced perspective. Let’s compare them on different parameters to see how they stack up against each other.
Ownership Arrangement
Sole Proprietorship: Such entities have a single owner. This gives the owner complete control over business-related decisions.
LLC: These types of entities can have one or more owners. Also, it is not necessary for these owners to be individuals. Foreign entities and other LLCs can also become owners. However, insurance companies and banks can’t become LLC owners.
Taxation Arrangement
Sole Proprietorship: This structure offers a pass-through taxation system. As a result, the company’s income passes through to the sole proprietorship owner. The system is designed such that the owner has to report it on their individual tax return.
LLC: This structure also has pass-through taxation. However, these entities have the freedom to get taxed like an S-Corporation if they choose.
Process of Formation
Sole Proprietorship: The formation process for sole proprietorships is quite straightforward. The business can operate under the owner’s name. Alternatively, it can be formed under a fictitious name. For this, you can apply for a DBA (doing business as) in your state.
LLC: To form an LLC, you need to file Articles of Organization with the Secretary of State. In addition to this, you also need to make an Operating Agreement. This should define the responsibilities and roles of all of the LLC owners.
Personal Liability
Sole Proprietorship: In case of obligations or debt, the owner of a sole proprietorship is personally liable for it.
LLC: In case an LLC suffers a loss, the owners get personal liability protection.
Want to learn more about the similarities and differences between LLCs and sole proprietorships?
Here is a detailed infographic by GovDocFiling that explains it all:
About the Guest Author
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.