LLC or Limited Liability Company is a corporation that possesses characteristics of both a partnership and sole proprietorship business. A sole proprietorship is when a business has an owner and is known by the identity of that owner. There is no legal entity associated with a sole proprietorship; the owner is responsible for all the financial aspects of the business. To establish a sole proprietorship business, an owner only has to file the necessary documents to get the business registered and acquire a license. But for an LLC, the process is a bit more complicated.
In LLC, the owner can be more than one person, including other companies and LLCs. As LLC is formed by a hybrid business structure, it does have some of the qualities as a sole proprietorship.
Also read Types of Business Ownership
LLC vs Sole Proprietorship
A sole proprietorship is the simplest form of business. It’s flexible and easy structure has made it the most popular and common type of business in the world. People who are interested in the business field but have limited resources and connections prefer sole proprietorship to kick-start their careers. It is easy to form, yes but there are also risks involved.
As there is only one owner in the sole proprietorship, the owner has to take liability for the business to the point where it can affect his or her possessions. That means, if the business faces a loss or incurs debts, the owner must face it all alone, even if it means paying for the losses or debts with his or her funds. Sole proprietorship business cannot be distinguished from its owner, so the business is managed under the owner’s name in its entirety.
Signing checks, contracts and paying taxes, everything is conducted under the owner’s name and signature. Since the owner is the only one acquiring the profits from this sort of business, taxes must be paid by the owner as well. Like everything else, sole proprietorship business also has some ups and downs. The ups include simplicity in its formation, flexible management, absence of regulations and the choice of mixing business and personal resources if needed.
There are some risks in sole proprietorship as well. Such as- owners are accountable for the debts, losses, and liabilities of the business indefinitely, and any personal conflict or lawsuit can risk the existence of the business.
LLC operates with a combination of sole proprietorship and partnership business. We already explored the sole proprietorship region. Whilst LLC borrows some qualities from the sole proprietorship, there are some other features as well.
LLC can have more than one owner who is all addressed as members. Depending on the number of members, LLC can be either single-member LLC or multi-member LLC. There are minimal limitations when it comes to being an LLC member. The numbers aren’t limited as well, though it might be rare an LLC can have hundreds of members.
When it comes to the formation, it is obvious that LLC is more complicated to form than a sole proprietorship. But it is more convenient and flexible than a corporation. LLC is operated according to the agreement created by the members. This agreement can be very simple and basic or it can be detail-oriented, depends entirely on the members.
Members either control the ventures of LLC themselves or they appoint managers to do it. As for taxes, single-member LLC pays taxes as a sole proprietorship where tax depends on the amount of income and expenses of the LLC. For multi-member LLC, the members pay their taxes depending on their shares regarded in the company.
Which One to Choose?
Both LLC and sole proprietorship have intriguing features when it comes to managing a business. New entrepreneurs often face the dilemma of choosing between these two business structures. When it comes to startups, both LLC and sole proprietorship are considered to be most suitable. If you’re confused about which structure would be the best for your business, take a look at the features and approach the one best suited for you.
– A sole proprietorship is easier to kick-start and costs less than LLC
– In a sole proprietorship, your liability will extend to the point of losing your possessions if the situation arises (bankruptcy, accidents, lawsuit, etc.) whereas, an LLC, your liability would be limited and would not affect your personal properties
– It’s easier to get a sole proprietorship business registered with proper licenses and costs less. For LLC, you have to come up with a company name, get it registered and then get the permit from the proper authorities. You also have to pay a fee in more than one place to get your company registered. There is also an annual fee for LLCs to keep the company registered
– As mentioned before, the tax-paying process for both LLC and sole proprietorship are quite similar. You have to pay taxes depending on your net income. But, since LLC is a business formed in a more complicated way, the paperwork will be worse
– In a sole proprietorship, you can keep your business and personal funds together if you want. For example, you can use a single bank account for business transactions and your dealings. In LLC, you have to keep the both separate
– A sole proprietorship is managed by a single person, so the decision-making authorities befall that person only and it’s easier to take any business decision. In LLC however, decision-making power can be handed over to one person according to the agreement or it can be shared among all the members.
In the end, it’s entirely up to you which business structure you deem the best for your associations. You have the characteristics of both structures, you also have the pros and cons. Depending on the type of your business; choose the one you feel will be more convenient.