Sole Proprietorship versus Single-Member LLC

Formation

The main benefit of a sole proprietorship is that it is simple and inexpensive. The only requirement for a sole proprietorship is to confirm that the required licenses and permits have been obtained. In other words, the business and the individual business owner are essentially the same.

To form a LLC, the entity must be registered with the appropriate state agency. Articles of organization and a fee must be submitted as well. If there is more than one member in the LLC, you should have an Operating Agreement. To learn more about Operating Agreements, click here.

In order for your business to be a success, you must have funding. The funding for a sole proprietorship is the business owner’s personal funds or loans. It is often difficult for a sole proprietor to obtain a business loan and you will usually be required to execute a personal guaranty for the loan, which means you are personally liable to repay it.

The LLC structure permits the owners to add members. This allows them to pool their resources, which makes it easier to qualify for a business loan if necessary.

The sole proprietor’s income is taxed on the individual’s income tax return for federal taxes.

The LLC is given a “pass through” tax treatment which allows the profits from the business to be taxed on the income tax return of each member. It is important to confer with a tax professional to understand how your state or local taxes will impact your business’s taxes.

If you love the idea of being your own boss and not having to answer to anyone, both the sole proprietorship and single-member LLC are good options for you. However, if you do not have experience in running a business or you do not have the skills necessary to handle all aspects of the business, you may want to consider having a partner.

The individual owner and the business are considered the same in a sole proprietorship. As a result, the owner is personally liable for all debts and obligations of the business. Your personal assets could be at risk to satisfy business debts.

The LLC affords its members some protection from personal liability for business debts because a LLC is considered a separate and independent entity. In most cases, the only personal liability a LLC owner has is the financial contribution made by the owner to the LLC. The circumstances where the owner of a LLC is personally liable for business debts involve a personal guaranty or if the owner’s acts caused harm to another party.

Contact us today to schedule your initial consultation. The attorneys at The Swenson Law Firm provide a variety of business law services to entities of all sizes.

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