Classifying your business entity is a crucial decision that could affect your exposure to risks and how you pay for taxes. Choosing between a sole proprietorship and a limited liability company (LLC) can have small differences. However, you still have to consider the benefits and risks of each choice before starting your business.
To shine a light on each one, this blog will help you understand both sole proprietorship and LLC to help you make an informed decision about what choice will suit your business best.
What Is a Sole Proprietorship?
A sole proprietorship is a straightforward business form in which one person owns and runs the company. It is the easiest type of business form because it is unincorporated, so you won’t have to file documents with your state government. However, due to the fact that this type of business is not a separate legal entity from its owner, the owner is fully accountable for every part of the operation.
Acquiring a business loan can be more difficult due to you and your business being the same entity. Establishing business credit for your business all turns harder under a sole proprietorship. In addition, sole proprietors wouldn’t have legal protection from personal liability and business debts as they would in a limited liability company.
What Is an LLC?
A limited liability corporation is a type of business structure that is legally constituted by an individual or group of business owners and registered with the state’s administrative agency, typically the secretary of state. As a result of the law, the company is treated as a distinct entity, giving the owner more security in terms of money and legal rights.
The difficulty and paperwork involved when forming an LLC are its primary disadvantages. Even if you are the sole LLC owner, you must maintain separate books and accounts for your personal and company affairs. When renewing your company license, you’ll probably need to file an annual report with your state and prepare a separate tax return specifically for the LLC.
Difference Between an LLC and a Sole Proprietorship
The degree of liability protection that an LLC and a sole proprietorship offer is one of the distinctions between them. In a sole proprietorship, the owner is personally liable for all debts incurred by the company. This implies that the owner’s personal assets, such as their house or money, may be in danger if the company experiences financial or legal problems.
In contrast, an LLC provides limited liability protection, which insulates the members’ private assets from the company’s debts and legal obligations. This division of personal and corporate assets gives business owners extra security and peace of mind, especially when dealing with potential legal problems or financial difficulties.
Regardless of how you want to classify your business, you will still have to pay:
- Payroll taxes for employees.
- State and local sales taxes.
- Self-employment taxes to cover your Social Security and Medicare taxes.
- Any additional state or local taxes, like business tax.
Get Your Insurance from Pronto
When considering the appropriate business structure for your venture, it’s essential to also think about insurance. Regardless of whether you choose a sole proprietorship or an LLC, having the right insurance coverage is crucial to protect your business against unexpected events and potential losses.
At Pronto Insurance, we understand the unique needs of small businesses. Our expert advisors can guide you through the insurance selection process, ensuring you have the coverage you need to safeguard your business interests. Contact us today and get a quote!