What is a Sole Proprietorship

A sole proprietorship is an unincorporated business owned and run by one person. This option is the simplest, no muss, no fuss structure out there. You are entitled to all the profits of the business. However, unlike an LLC, you are also responsible for all of the liability.

What is an LLC?

A limited liability company (LLC) is a legal entity formed at the state level. An LLC exists separately from its owners—known as members. However, members are not personally responsible for business debts and liabilities. Instead, the LLC is responsible.

LLC vs. Sole Proprietorship

Choosing the right business structure when you start a new venture is a critical decision. Many small business owners favor these two popular setups for their flexibility and simplicity—limited liability companies (LLCs) and sole proprietorships.

Which one you decide on will depend on your situation, but some things you should consider when choosing your business structure are:

• Start-up costs
• Government regulation and how it could impact you
• Liability protection
• Tax implications

LLC vs. Sole Proprietorship differences

The following is a comparison of the key differences:

	LLC	Sole Proprietorship
Personal liability	Not liable for business debts and liabilities	Personally liable for business debts and liabilities
Management structure	1 or more members	One member
Mixing business funds and personal finances	Not permitted	Permitted
Business name registration	LLC required in company name (most states)	Operate under own name or DBA (“doing business as”)
Taxation	Profits taxed once via pass-through taxation on the owner’s personal returns	Profits taxed once via pass-through taxation. No option to file as a corp
Formation	Straight forward. File your Articles of Org & file forms with your Sec. of State	No formal action required to form Sole Prop. if operating under your own name
Fees	Pay a filing fee of between $50-$500	No costs. Register a DBA for $10-$120

LLC vs. Sole Proprietorship management structures

In an LLC, the business can be owned by one or more members. Its members usually manage an LLC, but they can also appoint a manager to handle the day-to-day operation.

The membership of an LLC and the way it will be run are laid out in a legal document known as an operating agreement.

Personal Liability Protection differences

With an LLC, your individual assets are considered hands-off when it comes to business debt collection or other claims if your company is sued. In most cases, creditors can’t touch your home, car, or personal bank accounts.

In a sole proprietorship, there is no separation between you and the business. You are entitled to all of the profits, along with all of the debts and obligations. You can even be held responsible for liabilities caused by your employees.

Mixing business funds and personal finances

Sole proprietors don’t have to worry about mixing business and personal accounts from a legal standpoint. In the eyes of the law, they’re regarded as one and the same. However, the practice is still discouraged by most experts.

In an LLC, you must be careful to keep banking records and funds separate from your own personal records and funds. Violating this rule can result in the loss of your limited liability protection.

Business name registration

State regulation of LLCs include required words which must be included in an LLC name—for example, “LLC” or “limited liability company” might be required at the end of an LLC’s name. Registering your LLC does give your name protection within your state.

Sole proprietors don’t face the same requirements. However, if the business owner plans on operating under a company name, instead of under their own name, they will need to register for a “fictitious business name,” or DBA (“doing business as”), in their home state.

Tax Implications for Sole proprietorship vs LLCs

By default, all profits made by an LLC are only taxed once. This is known as pass-through taxation. As the owner, the tax liability belongs to you and passes through to your personal tax return.

To file taxes, you report your operating results, including profit or loss, by submitting Profit or Loss From Business (Sole Proprietorship) (Form 1040, Schedule C) with your personal 1040 tax return. An LLC is very flexible and can also be taxed as a sole proprietorship, a partnership, or a corporation.

A sole proprietor also benefits from pass-through taxation, so you’ll report your business’s income or loss in the same way. The difference is that you don’t have the option to file as a corporation.

You’re also not required to pay taxes on the full amount of your sole proprietorship’s income. Instead, you’ll only pay taxes on the profit of your business.

An LLC has many benefits including tax advantages that aren’t available to sole proprietors, but any benefits will depend on your specific situation and it isn’t necessarily always the case, especially when you factor in the fees associated with operating an LLC. 

Whether an LLC is better for taxes depends on multiple factors, including your profit, expenses, and the type of work you do.

Forming a Sole proprietorship vs LLC

Forming an LLC requires you to file articles of organization, sometimes called a certificate of organization, with the state. Requirements vary by state.

Typically, an LLC operating agreement is drawn up to document the members’ and managers’ rights and duties. You should also expect to file certain forms with your state agency, usually the Secretary of State, and pay an initial filing fee that can range from $50 to $500. 

LLCs also have to file annual or periodic reports and pay a required filing fee in most states.

For sole proprietorships, no formal action is required to form your sole proprietorship if you are operating under your own name. If you want to use a different name, you will need to file for a DBA.

You may also need to acquire any mandatory licenses o