An LLC Vs. Sole Proprietorship

By Chris Blank

Sole proprietorships are the most common form chosen for new businesses, according to Business.gov. This is especially true for consultants, freelance journalists and other independent workers, Bankrate.com states. Another option for a solo professional is to form a limited liability company, or LLC. The up-front organization is more complex than for a sole proprietorship; however, an LLC offers advantages that are not available with a sole proprietorship.

LLC Definition

Although many people mistakenly use the term "limited liability corporation" to refer to LLCs, they do not have the status of a separate legal entity. Unlike a corporation, an LLC is not liable for corporate income tax; its earnings pass through the company directly to individual members, who pay federal income tax along with self-employment taxes. Owners of an LLC are called members -- corporations, resident aliens and even other LLCs may claim membership in an LLC. Individuals may also structure their companies as LLCs to gain legal protection for their personal assets, according to Business.gov.

Sole Proprietorship Definition

A sole proprietorship consists of anyone who is in business for herself or is self-employed, according to Business.gov. Sole proprietorships are not required to register with the state; however, if you operate under a fictitious name, you must register that name with the proper authority. Sole proprietors must also obtain any licenses required by the city, state or federal government to legally operate their particular businesses. Like LLCs and unlike corporations, sole proprietorships are not considered separate legal entities -- income is declared on individual federal and state tax returns. Sole proprietors must also pay self-employment tax, according to the IRS.

Ready to start your LLC? Start an LLC Online Now

Advantages of a Sole Proprietorship

Setting up a sole proprietorship is often as simple as opening a bank account for the business.You are not required to obtain an Employer Identification Number, or EIN, for a sole proprietorship unless you employ other workers. If you work from home and use your own name for your business, you may incur no start-up costs at all. Unlike a corporation, sole proprietorships are not subject to double taxation -- that is, corporate income tax plus tax on stockholders' dividends, according to Bankrate.com.

Advantages of an LLC

Unlike a sole proprietorship, an LLC provides legal and financial protection for the personal assets of its members against liability that results from transactions involving the business. In this respect, an LLC is more like a corporation. However, LLCs are not subject to corporate income tax or double taxation. In this respect, an LLC functions more like a sole proprietorship, according to Bankrate.com.

Ready to start your LLC? Start an LLC Online Now
Advantages & Disadvantages of an LLC in Iowa

References

Resources

Related articles

Different Types of Nonprofit Organizations

In the United States, federal tax-exempt status is available for many different types of nonprofit organizations. The types of nonprofit organizations recognized by federal law are listed in section 501(c) of the tax code. While most U.S. nonprofits fall under subsection 501(c)(3), there are several different classifications for various types of nonprofit organizations.

What Makes an LLC Different Than a PLLC?

When forming a new business, particularly if professional in nature, you should understand the difference between Limited Liability Companies and Professional Limited Liability Companies. An LLC is a business entity that is formed under state law. Some states allow for the formation of specialized LLCs, such as a the PLLC. Each state has different restrictions on each business type, and LLCs and PLLCs are not business entities that are available in every state.

What Are the Benefits of a S Corp Vs. an LLC?

Minimizing tax obligations and limiting legal liability are among the most important factors to consider in choosing a legal structure for your business. Depending on your particular circumstances, either an "S corporation" or a limited liability company, also called an LLC, may provide the most advantageous structure for your business.

LLCs, Corporations, Patents, Attorney Help

Related articles

PA Vs. LLC

A PA, or professional association, is a business entity that is limited to specific professions. In contrast, an LLC, ...

LLC Vs. Company

By definition, every limited liability company, or LLC, is a company. The reverse is not necessarily true. A limited ...

Can a Chapter C Corporation Carry Over to a Personal Tax Return?

Once you file the appropriate documentation to create a legal corporation in your jurisdiction, state and federal law ...

What Are the Tax Advantages of LLCs?

A limited liability company, or LLC, is a business entity that has the advantage of offering personal liability ...

Browse by category
Ready to Begin? GET STARTED