Owning your own business means you get to decide whether to operate as a sole proprietorship or an LLC. Here are some important points to consider:
What’s the difference between a sole proprietorship and an LLC?
The main difference between a sole proprietorship and a single-member LLC comes down to personal liability protection. With an LLC your personal assets are kept separate from your business assets, which protects your personal finances from any potential business debt. With a sole proprietorship, your personal bank account is your business bank account—there’s no separation.
Is a single-member LLC a sole proprietorship?
No. Even though both business entities may operate with only one member (or owner), sole proprietorships and single-member LLCs are totally different business structures. For one thing, all LLCs (including single-member LLCs) must be registered with a state authority (usually a secretary of state’s office), which requires completing and filing formation papers. Plus, LLCs provide personal liability protection.
Sole proprietorships do not need to register with a state agency, as LLCs do. In fact, you won’t need to do anything to have a sole proprietorship—if you sell any goods or services, you’ll have a sole proprietorship by default.
What are the benefits of an LLC vs. a sole proprietorship?
In addition to personal liability protection and paying state fees, there are some other areas to consider when deciding to between an LLC and a sole proprietorship:
- Management: With a sole proprietorship, making business decisions is easy because you’re the only person in charge of your company. While you might also be the only person in charge. With an LLC, however, you’ll need to file articles of organization with the state and (in most cases) create an operating agreement for your company to outline such processes as: voting, asset distributions, and even dissolution.
- Taxes: Sole proprietorships are similar to LLCs in the sense that both are tax-through entities, meaning the business itself doesn’t pay income tax. Instead, business owners pay taxes for the business on their personal tax return using Schedule C (or Form 1040). The main difference is that LLCs can also choose to be taxed as an S-corp or a C-corp (a traditional corporation).
Can I change a sole proprietorship to an LLC?
Yes. In general, to change your business from a sole proprietorship to an LLC you’ll need to follow your state’s protocols for starting an LLC. If you used a DBA for your sole proprietorship, you may need to cancel that before you can form an LLC with the same name. (It depends on your state’s naming laws.)