Sole Proprietor vs. LLC

What you need to know to stay safe

When you open a business, one of the first choices you need to make is the form it will take. For most small businesses, the choice will come to a sole proprietorship or an LLC. The former is much easier to create, and thus may tempt you when you want to get up and running quickly. But the financial implications of LLC formation go well beyond your beginning costs, and can give you important savings and peace of mind in the long run.

Up Front Costs

A sole proprietorship is the most popular form of small business in the United States, largely because it takes little time or preparation to get started. You may need licenses and local, state, or federal permission to do business, depending on what you do, and you have to put up the costs to get going out of your personal assets. But beyond this, all you really have to do is start doing business. In contrast, an LLC requires corporate filings, including articles of organization, and filing fees that can be several hundred dollars. You have to separate your personal and business holdings and ensure you do not mix the two. Because the LLC is a more formal and registered arrangement, you can expect more up-front costs and a more complex process to get yourself up and running.

Tax Implications

On the other hand, the financial implications of LLC ownership turn in your favor at tax time. The expenses you put into either form are tax deductible, but you have options in the LLC, include taxing as a pass-through on your personal tax return or filing a return for the entity itself. Therefore, you can choose the tax return that gives you the greatest advantages and the best treatment for your financial situation.  It gives you greater control over keeping the most earnings you can.

Liability

The biggest advantage to an LLC over a sole proprietorship comes in your protection from personal liability. An LLC provides a layer of protection for you and allows you to prevent any judgment against the LLC from reaching your personal assets. You should expect to carry liability insurance on your business, and any assets you have registered and filed as part of your LLC are subject to liability if someone sues your business. But the financial implications of LLC formation keep you from losing your home, your vehicles, or any other personal funds or financial holdings.

To gain these advantages, you need to ensure you follow all the rules of forming a proper LLC and maintaining it under the rules and regulations your state creates. But once you do so, you stand to reap tremendous financial benefits that give you peace of mind for as long as you operate the business.