Are you thinking of starting a new business? Then, you need to identify the business structure that suits your business needs best.
Business entity/structure governs your business operations, ownership arrangement, tax liability, and overall management. Out of all the business structures available to business owners in the US, Sole Proprietorships and LLCs are the most common. Sadly, a lot of business owners are not clear about how the two differ from each other. Let’s talk about that in this post.
1. How the Two Structures Differ in Terms of Ownership
Sole Proprietorships are owned and managed by individuals, not corporations or other companies.
On the other hand, LLCs can be owned by two or more entities called “Members.” These members can be individuals, corporations, other LLCs, but not banks or insurance companies.
2. How the Two Structures Differ in Terms of Formation
A Sole Proprietorship is very easy to set up, especially if it’s done under your name. However, if you intend to use a fictitious business name, you’d have to file for Doing Business As or DBA in your state.
For setting up an LLC, you need first to file the Articles of Organization with the Secretary of State, stating details about your members and their management roles.
Both business types have to pay an annual filing fee that varies depending on the state of business formation.
3. How the Two Structures Differ in Terms of Tax Liability
Both entities can take advantage of pass-through taxation. That means their business income passes through to their income, so they don’t have to pay tax twice.
But Sole Proprietorship owners are required to pay an additional self-employment tax. On the other hand, LLCs can choose to be considered an S-Corp for taxation purposes and avoid paying self-employment tax in return.
Need Detailed Information?
There are many minor differences between LLC and Sole Proprietorship structures that you need to know before deciding which is the best option for your business.
Take a look at this infographic made by GovDocFiling for a complete rundown of all the differences and similarities between the two structures.