One the first questions entrepreneurs ask when they start doing business for themselves is whether they should start a sole proprietorship or an LLC. It’s a tough question because there are pros and cons of both, of course. Below, to help make your decision easier, we give you the 411 on the differences between starting a sole proprietorship and starting an LLC.
Sole Proprietorship: Pros and Cons
A sole proprietorship can be defined as “A business that legally has no separate existence from its owner. Income and losses are taxed on the individual’s personal income tax return.” Sole proprietors, which can include (but are not necessarily the same as) solopreneurs and side-giggers, are the “chief cook and bottle washers” of the business world. In most cases, sole proprietors own small or part-time businesses with no employees.
The main advantage of a sole proprietorship over an LLC is the simplicity. As the Entrepreneur says, “There is no easier way to launch a business than as a sole proprietor.” There are no costs associated with establishing a sole proprietorship. Additionally, taxation is quite simple since a sole proprietorship is indistinguishable from its owner.
Even though the sole proprietorship is the simplest form of business start up, there are a few disadvantages to this form of business. For example, if you choose to start a sole proprietorship and your business goes into debt, you are personally responsible for this debt. In fact, creditors can go after a sole proprietor’s home, car, and other personal property to satisfy debts. Therefore, in some cases a sole proprietorship may not provide entrepreneurs with the legal and tax advantages that an LLC does.
LLC: Pros and Cons
An LLC, or limited liability company, can be defined as “A form of business organization with the liability-shield advantages of a corporation and the flexibility and tax pass-through advantages of a partnership.” The LLC can be thought of as a combination between a partnership and a corporation. This form of business originated from business owners’ desire to develop a structure that allowed them to distribute income to the partners while also protecting themselves from personal liability for the debts of the business.
A significant advantage of the LLC over the sole proprietorship is the limited liability. According to Bloom & Associates, P.C., a member’s liability is limited to the amount of their investment in the LLC, which means that a member is not personally liable for the debts of the LLC. In contrast, a sole proprietor would be liable for the debts incurred by the business.
A disadvantage of starting an LLC is that they are more expensive to operate than a sole proprietorship or general partnership. The average cost to set up an LLC is approximately $1,000. Additionally, the taxation for the LLC is slightly more complex. According to Legalzoom, a limited liability company owner may have to pay unemployment compensation for him or herself, which he or she would not have to pay as a sole proprietor.
So should you start a sole proprietorship or an LLC? Clearly there are pros and cons of both that must be considered prior to making your decision. It ultimately comes down to what type of business you’ll be pursuing. Are you providing services that may have the potential for a customer to sue you if something goes wrong? If so, an LLC might be a better choice for you.
Whether you decide to start a sole proprietorship or an LLC, you’ll need to think about how you’re going to get paid and get more business. The good news is, there’s an easy choice to make that makes it simple to send bills, get paid and sell more.
MACH1 has all of the powerful features you need to help your business thrive while giving you more time to pursue the things that inspired you to start your business in the first place. For instance, MACH1 gives you the ability to accept electronic payments via ACH at no cost so you can be paid faster – without having to incur expensive credit card fees. Another feature that is unique to MACH1 is being able to create awesome-looking, professional bills with just a few taps on your smartphone. Plus, you can send bills via email or text message, which is convenient for both you and your customers.
Download the MACH1 app now to see for yourself how these powerful features can take your sole proprietorship, LLC, or any form of business to a whole new level!