Tag Archives: business structure

Sole Proprietorship or LLC for a Small Business?

There are a number of different business structures that new small business owners can choose, but two of the most common are the sole proprietorship and LLC (limited liability company). Keep the following considerations in mind as you’re deciding between the two.

Ease of Organization

As soon as you trade a product or service for money and make a profit you’re technically a sole proprietor. The business is YOU. You usually don’t have to officially register the business unless you need to get licensing or pay sales tax. With an LLC you have to submit paperwork to the state where you want to organize. The process requires a few extra steps, but can be completed rather quickly by an LLC filing service (this service usually doubles as the registered agent).

Cost of Doing Business

It’s important to know in advance that when you’re running an LLC you’re going to be responsible for paying annual fees to keep your status. That includes a registered agent fee (this is the company manages your LLC and receives any official mailings) and a state LLC tax. Sole proprietors only have to pay their yearly income taxes associated with their business activities. You have to ask yourself if the annual cost is worth the benefits of maintaining an LLC status. Many business owners gladly pay the fee for the business and personal protection it offers.

Personal Protection

The main benefit of filing as an LLC is that your personal matters are considered separate from the business. It is similar to a corporation in that it is its own entity. In most cases, any debts or judgments against the business will not be issued against your personal assets. When you operate as a sole proprietorship you are exposed to risk that could affect your personal property.

Credibility

If you’re planning to start a business where you’ll have to make deals, hire people and work with suppliers, credibility is an issue. Some people feel more comfortable working with an officially registered business that has an “in good standing” LLC status. They may want to look up your company to learn more about your business reputation before working with you. If you do business as a sole proprietor they may have a hard time researching this information. If you are a sole proprietor, at the very least invest in a fictitious name filing so that you can put that on your letterhead and have a searchable record with the state.

Keep these issues in mind and consult with a business adviser to help you decide if you should operate your company as a sole proprietorship or LLC.



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