When it comes to starting a small business, the two structures most frequently chosen are a Limited Liability Corporation, commonly referred to as an “LLC” or a sole proprietorship (“SP”). Both offer particular advantages for new entrepreneurs. However, there are distinctions between LLCs and SPs which are important to understand. Below is a shortlist to help guide your decisions on important issues that will impact your small business.
LLC vs Sole Proprietorship
To start, the main distinction between an LLC and SP is that an LLC offers the business owner personal liability protection and a corporate shell to isolate personal assets from the debts of the business. A sole proprietorship offers no such protection, and any financial troubles the company experiences will impact the owner’s personal finances and credit.
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Below we’ve listed additional areas where LLCs differ from SPs.
- LLC – Initial registration fees and annual fees
- SP – No initial fees, and no annual fees. However, you should still register the business in the city in which it is headquartered and you still need a business license.
- LLC – LLC’s are regulated by the state, and those regulations vary depending upon the state in which it was established. They can include the requirement of having an operating agreement or a registered agent for your LLC. These regulations can also require you to keep up with various paperwork annually and in a timely manner.
- SP – SP’s are not subject to regulation.
- LLC – States require that business names include the acronym LLC. Further, no two LLC can have a name so similar that it could cause confusion to the public.
- SP – There are no requirements when naming your SP.
- LLC – Owners of an LLC can be taxed as a sole proprietorship, partnership, or corporation. This gives the owner(s) more control over taxes and other budgetary matters.
- SP – Revenue from an SP is taxed as personal income and reported on your personal income tax return.