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Millions of businesses are started in the United States every year. In fact, 2020 alone saw over 4.41 million new business applications. However, when you’re starting a business, one of the most important decisions you’ll have to make is that of the corporate structure.
There are numerous corporate structures that you can choose from and Sole Proprietorships and Limited Liability Companies (LLCs) are among the most popular ones.
It’s important to figure out which structure is the right one for you as it determines your tax implications, management structure, and more.
To help you select between the two, we’ve put together this guide.
So, let’s dive right in.
Ownership Structure
One of the biggest differences between sole proprietorships and LLCs is their ownership structures. Sole proprietorships have a single owner. On the other hand, LLCs can have one or multiple owners.
What’s more?
These owners or “members” needn’t be individuals. They can be other LLCs, foreign entities, etc. However, banks and insurance companies can’t be members of an LLC.
Formation Process
The process of forming an LLC is vastly different from that of establishing a sole proprietorship firm. In the case of sole proprietorships, you can run the business under your own name. Alternatively, you can file for a doing business as (DBA) in your state and pay a filing fee to operate under a fictitious name.
But what about LLCs?
To form an LLC, you need to file your Articles of Organization with the Secretary of State. Additionally, you’ll need to create an LLC Operating Agreement that defines the roles and responsibilities of all the members.
What’s more?
You also need to pay a state filing fee to establish your LLC.
Tax Implications
The major difference between sole proprietorships and LLCs lies in the way they’re taxed. However, there are certain similarities between them too. For instance, both the entities offer pass-through taxation features which means that all the profits and losses of the company pass through to the individuals.
This means that you’d have to pay self-employment taxes as a sole proprietor. In the case of LLCs, you can also choose to get taxed as an S-Corporation.
But regardless of the type of business structure you opt for, it’s extremely important to ensure that you complete your paperwork and legal requirements in the right manner. Without that, you might find it challenging to start a business legally.
To understand more about how Sole Proprietorships and LLCs are different from each other, you can check out this infographic designed by GovDocFiling.
About the Author
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.
