In March 2021, more than 440,000 applications were filed to establish new businesses in the US. It’s evident that entrepreneurship is becoming more of a popular choice.
If you are also someone who wants to establish their own business, you should know that one of the first things you’ll need to decide on is your business structure.
Out of all the entity types, the most commonly chosen ones are Limited Liability Corporation (LLC) and Sole Proprietorship. Both of these business structures are relatively easy to form. However, they have their advantages and disadvantages.
Before you pick the right business structure for your business, make sure you understand what you are signing up for. In this post, let’s take a look at how these two business structures differ in terms of the formation process, ownership structure, and taxation arrangement.
Formation Procedure
Forming a Sole Proprietorship can be done in two different ways. You can run the business under your own name or through a fictitious name. If you choose the latter option, you’ll have to pay some fees to file for a DBA (Doing Business As) in your state.
To establish an LLC, you will have to file Articles of Organization with the Secretary of State and create a special LLC operating agreement. For LLC formation, you will also need to pay the state filing fees as well as the annual filing fees in most states. The state filing fees for LLCs can range anywhere from $50 to $500 in different states in the US.
Ownership Structure
There is a major difference between an LLC and a Sole Proprietorship in the ownership structure. Only one person can own a Sole Proprietorship. On the other hand, one or more persons can own and run an LLC.
Along with individuals, even foreign entities and other LLCs can become LLC owners or members. The only limitation is that banks and insurance companies cannot become LLC members.
Tax Implication
The owner of a Sole Proprietorship needs to report their business income as a part of their individual tax return. They also need to pay self-employment tax to the federal government.
All LLC members have to pass their profits and losses through their individual tax returns. However, they also have the option to get their LLC taxed just like a Corporation.
Want more details on Sole Proprietorship and LLCs? Please check the infographic below by GovDocFiling:
