Should I Form An LLC Or Sole Proprietorship?

Over half a million people start new business ventures each year.

If you’re one of the people that has started a business in the past year, have you thought about tax implications? It’s not a fun topic to think about, but starting your business the right way can save you a ton of money down the road!

As a business owner, you are probably thinking “Should I form an LLC or Sole Proprietorship?”

Great question! Keep reading to learn the pros and cons of each.

What Is an LLC?

A Limited Liability Company (LLC) has perks that a Sole Proprietorship may not have. When you form an LLC, you are creating a legal entity at the state level.

Advantages

The biggest advantage to an LLC is that it separates your personal assets from your business. If your business happens to ever be sued, your personal assets are not at risk since the LLC protects you from being liable for them.

You also get the following perks if you form an LLC:

• More market credibility
• Easy to obtain debt financing

Disadvantages

If you are looking to form an LLC, you should be aware of the disadvantages as well. The following are the disadvantages of forming an LLC:

• State paperwork is required to form the LLC
• Annual state renewal fees every year after the formation of the LLC
• Federal, state, local, and self-employed taxes are required
• Higher cost for completing a tax return

What Is a Sole Proprietorship?

Forming a Sole Proprietorship is deemed to be as simple as forming a small business. Although that’s the case, this also means it is a less formal entity than an LLC. This is perfect if you are testing out a small business venture.

Advantages

There are multiple advantages to a Sole Proprietorship that differ from an LLC. They are as follows:

• You are the principal owner of the business
• No annual state filings to complete
• No state paperwork
• Profits are part of the owner’s tax return
• Self-employed tax benefits

Disadvantages

One of the biggest disadvantages to forming a Sole Proprietorship is that you can be liable for everything. There is no liability protection.

If worst comes to worst, your personal assets can be at risk if something happens to the business. Just as this is an advantage to an LLC, it’s a disadvantage for a Sole Proprietorship.

You also have the following disadvantages:

• Losses are filed under the owner’s tax return
• Difficult to establish business credit
• Less market credibility

So Should I Form an LLC or Sole Proprietorship?

You may still be asking, “Should I form an LLC or Sole Proprietorship?” And there’s no right answer to this question!

Whether you choose to create an LLC or Sole Proprietorship for your business, you need to weigh the pros and cons for your personal and business needs.

If you enjoyed reading this helpful article, check out more from our Business and Startup sections on the blog!