It’s important to select the right business structure when you’re starting your business. Here’s a guide to choosing between Sole Proprietorships and LLCs.
The most obvious question that you might face when you’re starting a business is that of selecting the business structure. One of the reasons behind this is that each corporate business structure comes with its own advantages and disadvantages.
Be it the taxation or the process of starting the business, you need to decide on your business structure carefully based on your requirements.
Among the many business structures, Sole Proprietorships and LLCs are the most common ones. But which one is the right fit for you?
Let’s find out.
Business Ownership Structure
While Sole Proprietorships are run by a single person, LLCs can have multiple owners who are called members. These members can be other entities like LLCs and foreign firms but they can also be individuals.
Business Formation Process
The process that needs to be followed to form your business is different for both LLCs and Sole Proprietorships. Sole Proprietorships can be run under your name, but you can also choose to get a fictitious name for one by applying for a DBA (Doing Business As).
When it comes to LLCs, you need to follow a slightly different process. You need to file your Articles of Organization with the Secretary of State. In addition, you need to create an LLC Operating Agreement and pay the state filing fees.
The way LLCs and Sole Proprietorships are taxed is different too. While both structures allow pass-through taxation, you do have the option to get taxed as an S-Corporation if you own an LLC.
Pass-through taxation means that the income would flow through to the individuals and would have to be reported on their personal tax returns. However, in such a case, you would have to pay self-employment taxes. S-Corporations allow you to avoid this tax but you’d have to pay corporate taxes in that case.
Want to learn more about LLCs and Sole Proprietorships?
Here’s a detailed infographic created by GovDocFiling that will help you understand them better.
AUTHOR PROFILE: 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.