LLCs and Sole Proprietorships: Which One Should You Choose?

Did you know that over 1.35 million new businesses filed applications to start in the United States in the first quarter of 2021 alone? This marked a major increase compared to 837K in the previous year.

Image via Oberlo

This points to the fact that more people are trying their hands at entrepreneurship than ever before.

So, if you’re one of those people, you must know business structures and their pros and cons very well. After all, a lot of features of your business would depend on them.

The two most popular business structures you can choose from in the US are Sole Proprietorships and LLCs.

This can make it confusing to choose between them. To help you out, we’ve put together this guide.

Who Owns the Business?

One of the things that the corporate business structure dictates is the ownership of the company.

As it’s clear from the name, Sole Proprietorships have a “sole” or single owner. So, if you’re considering a partner in your business, this is not the best option for you.

But with LLCs, things are different. You can be either a single owner or have multiple owners, who are called members.

Additionally, unlike Sole Proprietorships, the owners needn’t be only individuals. Instead, they could be foreign firms and other LLCs too.

How Does Taxation Work?

As far as taxation is concerned, both Sole Proprietorships and LLCs are attractive for small businesses.

The reason is simple — they both offer pass-through taxation.

What does this mean?

In this feature, the income of the company passes through to the owners. As a result, you’d only have to pay your personal income tax.

However, along with this, you’d also be required to pay a self-employment tax. This can be avoided by LLCs though. For that to happen, you’d have to get your LLC taxed as an S-Corp.

When you do so, you’ll be treated as an employee of your business. As a result, you’ll be saved from the self-employment tax.

But you’d instead have to pay a corporate tax for your S-Corporation.

How Can You Form the Business?

The formation process is where LLCs and Sole Proprietorships are vastly different. It’s relatively easy to form a Sole Proprietorship firm. All you’d have to do is start running it under your name.

If you’d like to give it a different name, you can apply for a fictitious name by filing for a Doing Business As (DBA) in your state and pay a filing fee.

However, the process of forming an LLC is slightly more complicated. You first have to file your Articles of Organization with the Secretary of State. Next, you’d have to outline an Operating Agreement for your LLC and then pay the state filing fees. These fees would also have to be paid in each subsequent year of operation.

These are but a few of the differences between LLCs and Sole Proprietorships. There’s a lot more that you need to know before deciding on the right one for you. To understand more about them, take a look at this infographic developed 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.