Business Structures: The Pros & Cons of Sole Proprietorships & LLCs
One of the many decisions you’ll make in starting a small business is deciding on which business structure to be formed as.
Being a small business owner you will be faced with many decisions to make and choosing the right business structure may not be the first thing on your mind. However choosing the right business structure is a key decision and it can affect your tax obligations, personal finances, accounting, etc. With that being said, this will be Part I of a two-part series we will be doing on Business Structures.
Sole Proprietorship
You may be running a Sole Proprietorship and not aware of it. A sole proprietor is a business structure that is owned and managed by one person; there is no legal protection between the business and the owner. In other words (the business owner) is the business.
Pros
It is the easiest business structure to form with minimal paperwork and fees. The Business owner has 100% control of business decisions and profits. Business income and expenses is filed with Schedule C, which is attached to the owner’s personal tax return, on Form 1040.
Cons
In contrast to the pros, owner is personally liable for everything the business is liable for (debts, etc), which means there is no clear boundary. There is heavy difficulty with raising loans and sole proprietors cannot be sold or transferred to a potential investor.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure that is a separate legal entity from its owner(s). LLCs can be owned either by a single owner or more people. This is a great option for a business owner who is seeking legal protection from their personal assets and wants to keep them separate.
Pros
An advantage of owning an LLC is that is a separate legal entity and owners enjoy limited and are only responsible for their own neglect. Liability is limited to the owner’s capital contribution invested. There is also flexibility with income taxes.
Cons
In setting up an LLC, there are filing requirements that must be followed as well as fees to set up and maintain LLC status. Be sure to refer to your state’s requirements. Also because LLCs are similar to partnerships, they can only be transferred if it is allowed by the Operating Agreement and if the state law allows for it.
In our next installment, we will learn the pros and cons of a partnership & a corporation.
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This material has been prepared for informational purposes, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.