Before we dive into the main differences of an LLC vs Sole Proprietorship we will try to define what each is in order to get a better grasp of how they can be useful to your business.
What is a Sole Proprietorship?
A Sole Proprietorship is a common and popular way to start a small business but it is not a legal entity such as an LLC or a Corporation. A Sole Proprietorship is not legally separated from its owner and the business owner is solely responsible for all dealings, taxes and liabilities.
What is an LLC?
An LLC is the most popular business formation as it is inexpensive and relatively simple to set up and run. To set up an LLC you need to file the Articles of Organization with the Secretary of State and create an operating agreement which is an internal document that defines the management roles and how your business will operate.
Sole Proprietorship vs LLC
Now that we have quickly defined what a Sole Proprietorship and LLC is we can spot the first obvious difference: a Sole Proprietorship is not a legal entity and is considered an informal business and an LLC is a business entity with legal structure.
Apart from this first basic difference we go on to point out the main differences between the two and also describe what kind of a small business model might be a good match for a Sole Proprietorship or an LLC. As well as what factors small business owners should take into consideration when choosing between the two.
Liability Protection
The most important difference between an LLC and a Sole Proprietorship is that the former offers limited liability protection to the owner of the business so if someone was to sue your business all of your assets would be protected. On the other hand if you have a Sole Proprietorship you are completely unprotected from liabilities, if the business gets sued the business owner is basically being sued and all of his personal assets are liable.
Business Tip: A Sole Proprietorship is a good fit for businesses that are not high risk with liability, meaning that the industry your business is in is unlikely to get sued. Also it is more suitable for small business ventures that do not expect to make a big profit at least in the beginning.
Pass-Through Taxation
Both an LLC and a Sole Proprietorship have the same kind of taxation, all of the income to the business passes through to the personal income of the business owner and is taxed on their personal income tax return.
Branding
Regarding the name of your business and what options you have a Sole Proprietorship has restrictions as to what name you can use for your business. Your business’s legal name must be the same as your surname. The only way around this is by appointing a DBA, if that is possible in the state you are in, and then changing your legal name to your Doing Business As name.
On the other hand, an LLC does not need to use their business owners surname as their brand name; they can use their legal name as their brand name without needing to file for a DBA.
Formation Cost
The cost of forming a Sole Proprietorship is very minimal – you do not need to file any documents with the Secretary of State as it is not a legal entity. The cost goes up considerably if you intend on forming a DBA to help brand your Sole Proprietorship. On the other hand, setting up and running an LLC is also quite inexpensive and the filing process is simple.
If you want to find out more about the differences and similarities of an llc vs sole proprietorship and even get some guidance on how to set up your own LLC or Sole Proprietorship have a look at the TRUiC website and access their extensive database filled with guides and useful tips for small businesses.