Millions of new business applications are filed every year in the United States. While 2.5 million of these were filed in 2010, the number nearly doubled by 2020 to reach 4.35 million.
So, if you’re a new entrepreneur looking to dip your toes in the world of businesses, you likely have a lot on your plate. From finding new employees for your business to looking for funding, there’s so much that you need to do.
In all of this, deciding on a business structure can be challenging. That’s why we’ve put together this guide to help you choose between Sole Proprietorships and LLCs.
Let’s take a look at their differences.
Both Sole Proprietorships and LLCs offer a feature called pass-through taxation. This means that all the income of the business will pass through to the owner’s personal income tax return. The advantage here is that you’ll be saved from double taxation.
The difference between the two is that LLCs can also choose to be taxed as an S-Corporation. This means that owners will be treated as employees and charged on their personal incomes, while the business will pay a separte corporate tax.
2. Ownership Structure
Sole Proprietorships only have a single owner. So, if you’re planning to have any business partners, you’d have to go for an LLC. The owner for a Sole Proprietorship has to be an individual.
LLCs are more flexible in that regard. You can have both single and multiple owners, called members, in an LLC. These members can also be other LLCs and foreign entities.
3. Business Formation
Starting a sole proprietorship is easy, as you can simply start running your business under your name. Alternatively, you can file for a DBA (Doing Business As) to run it under any other name.
To start an LLC, you’d first have to file your Articles of Organization with the Secretary of State. Additionally, you’ll need to pay a state filing fee and draft your LLC Operating Agreement.
There’s a lot more to LLCs and sole proprietorships than these differences. To learn more about them, check out this infographic designed by GovDocFiling.