As a budding entrepreneur, you might be wondering how best to structure your business. For small businesses, the two most common options are sole proprietorship and an LLC (limited liability company).
Each of these structures has advantages and disadvantages. You are well-advised to consult with an accountant or an attorney to determine which one suits your needs. But in the meantime, let’s take a closer look at both of them before you launch your startup into the world.
What is a Sole Proprietorship?
An unincorporated business that is owned by an independent individual or one person is considered a sole proprietorship. It is typically credited as the easiest business model to start. It can take several forms, for instance, a freelancer/contractor or a franchisee. You can also be a business owner, which gives you more autonomy than being a freelancer or contractor.
If you use your own name to start a sole proprietorship — for example, Jane Doe Fitness Center — you do not have to register your business with the state.
You could also create a name for your business, such as Ageless Body Fitness Center, and register for a DBA, which means “doing business as.” A lawyer can advise you of the best option, or you can contact your local clerk’s office to see if a DBA is necessary for you to do business in your area.
As a sole proprietor, you still need to apply for any necessary permits or licenses your state or region requires to operate your business. The type of permit or license you will need depends on your industry and where you reside.
Advantages and Disadvantages of a Sole Proprietorship
About 73 percent of businesses in the country are sole proprietorships. They are easy and affordable to start, you have complete control over your company and accounting is simplified. This business model is attractive to many different types of professions, including writers, designers, IT consultants, hairstylists, fitness trainers, gardeners, and dog walkers.
The biggest disadvantage of being a sole proprietor is that you and the business are considered one legal entity. You will be personally responsible for employees’ health and safety, wages, and all debts, taxes, or lawsuits for your company.
Another drawback is that sole proprietorships are much less likely to receive traditional financing. So, you might need to rely on other options such as crowdfunding or bootstrapping.
What Is an LLC (Limited Liability Corporation)?
There are nearly 22 million LLCs in the US. This type of business structure is a hybrid of a sole proprietorship or partnership and a corporation. It protects you personally from any debts or liabilities of the company. This is its greatest advantage over a sole proprietorship.
Regulations for LLCs vary from state to state. For instance, most states allow single-individual LLCs, but not all. Owners — referred to as members — of LLCs can be individuals, corporations, other LLCs, foreign individuals, and corporations. Some businesses cannot be formed as LLCs, such as banks and insurance companies.
When forming an LLC, it is very important to ensure that certain forms are filed for IRS purposes. For instance, a domestic LLC with at least two members must file Form 8832 or it will be treated as a partnership for federal income tax purposes. Your lawyer or accountant can assist you with these filings.
Some of the largest companies in the country are LLCs. They include Nike, eBay, Johnson and Johnson, and PepsiCo. But your company does not need to be a multinational giant. Most types of businesses can be registered as LLCs, including not-for-profits. Some exceptions include law firms and doctor’s offices.
Advantages and Disadvantages of an LLC
There are nearly 22 million LLCs in the US. This type of business structure is a hybrid of a sole proprietorship or partnership and a corporation. It protects you personally from any debts or liabilities of the company. This is its greatest advantage over a sole proprietorship.
Regulations for LLCs vary from state to state. For instance, most states allow single-individual LLCs, but not all. Owners — referred to as members — of LLCs can be individuals, corporations, other LLCs, foreign individuals, and corporations. Some businesses cannot be formed as LLCs, such as banks and insurance companies.
When forming an LLC, it is very important to ensure that certain forms are filed for IRS purposes. For instance, a domestic LLC with at least two members must file Form 8832 or it will be treated as a partnership for federal income tax purposes. Your lawyer or accountant can assist you with these filings.
Some of the largest companies in the country are LLCs. They include Nike, eBay, Johnson and Johnson, and PepsiCo. But your company does not need to be a multinational giant. Most types of businesses can be registered as LLCs, including not-for-profits. Some exceptions include law firms and doctor’s offices.
