Which Business Structure Is Better – Sole Proprietorship or LLCs?

Which Business Structure Is Better – Sole Proprietorship or LLCs?

The first step to determine before starting a new business for an entrepreneur is its structure besides many other things. Business structure defines how your organization will obtain legal recognition. Entrepreneurs commonly use sole proprietorship or LLC [Limited Liability Companies] for a start.

Sole proprietorship VS LLC

A sole proprietor is most straightforward for starting a business because it needs no formal registration. It is a structure, where you have total control over the growth and development of the business. However, with this freedom there is the liability to consider like someone slips & falls on business premises or company cannot pay dents or company damages client’s property. As a single owner, you will be liable for paying sole proprietorship taxes. 

You will also be legally responsible for any contingencies that arise. It is better to consult the professionals at Savvy & Suite LTD. to understand the tax code and ways to optimize it. The professionals have educated many business owners and individuals about controlling their finances.

For home-based business sole proprietorship NYC is a great alternative as it is less complex. It can be named differently like ‘DBA or doing business as’. It allows single proprietors to use business names instead of a personal name. DBA will never include terms like LLC or incorporated or corporation unless the business is legally operated as such.

A sole proprietor can transfer into LLC to obtain legal protection. The owner, partner, directors, or other executives gain personal protection from legal and financial liabilities including their negligence while administering the business.

LLCs with a single owner are treated in the same way as in sole proprietorships by the IRS. It means the owner attaches business revenue to their personal income tax returns like they would in sole proprietorships. The requirements and process to form an LLC differ from one state to another.

When you determine appropriate business structure there are several things to consider…..

Evaluate personal liability

  • A sole proprietor is responsible for debts and legal consequences. It means their personal assets like car, home, and saving are at risk if things go in the wrong direction.
  • LLC offers protection against such liabilities as they are regarded as separate entities. If your startup involves high liability then go for LLC.

Recruiting employees

  • A sole proprietor can hire as many employees as they want. The issue arises when an employee is injured or ill on the job because the employer is liable for their medical expense.
  • LLC needs to have EIN [Employer Identification Number] for hiring employees. IRS issues the EIN, which is crucial for paying payroll tax and filing tax returns.

Tax payment

In both single ownership and LLC, the owner or member is liable to file all their tax returns [personal and business].

State registration

Depending on the sector, you may need to obtain a license before operating, regardless of business structure.

  • For a sole proprietor, there is a need to attain a proper license and business name registration.
  • LLC needs state registration, which occurs when the ‘Articles of organization’ is filed. Each LLC member’s responsibilities are defined in the article. The registration rules and fees differ. For example, in NYC the LLCs need to publish their formation in 2 newspapers within 120 days of article filing.

Choose a business structure that offers a proper balance of protection and flexibility!