The main difference between a sole proprietorship and an LLC is legal liability. An LLC is a business entity that is both legally and financially separate from its owner and members. A sole proprietorship is an unincorporated business operated by an individual, making that individual completely liable for all business debts and assets.
So, you have a dream to open a business. The decisions you have to make come at you at a pace that makes the formation of your business a candidate for the next installment of the motion picture franchise Fast and Furious. Yet there is one decision that stands above all the rest in terms of importance. Do you want to form a sole proprietorship or a Limited Liability Company (LLC)?
These two types of structures remain the most popular among entrepreneurs. Which one you choose goes a long way towards determining the success of your new business venture. As you review the following information, keep in mind that forming a Wyoming LLC, in particular, provides advantages that are unavailable to sole proprietorships and general partnerships.
Overview of an LLC and a Sole Proprietorship
Formed at the state level, an LLC operates as an entity that is separate legally and financially from its members. The members of an LLC are not obligated to pay off business debts and liquidate assets.
On the other hand, a sole proprietorship is an unincorporated business that one individual operates. The main disadvantage of starting a sole proprietorship is the individual who starts it is 100 percent legally liable for all debts and assets.
More than one member can form an LLC, with the members having the right to delegate management responsibilities to an individual who is not a member of the LLC. An operating agreement represents the legal foundation of how an LLC operates.
A sole proprietorship runs with one person calling all the business shots. There are no members, partners, or a designated manager that has any input into making business decisions.
The Importance of Protection Against
Members of an LLC do not have to face the prospect of losing personal assets because an individual or a business entity files a civil lawsuit. In a vast majority of cases, creditors cannot liquidate the personal assets of the members that belong to an LLC. Personal asset and financial protection is the most frequent reason entrepreneurs cite for forming an LLC.
Sole proprietors do not enjoy the same legal protections granted to the members of an LLC. There is no legal barrier between your personal assets and creditors. Although a sole proprietor reaps the financial rewards of all the profits, the individual is on the financial hook for all debts and other financial obligations. Sole proprietors also can be held legally liable for the actions committed by their employees.
The most popular reason why entrepreneurs form LLCs is the tax advantages the business entity brings to the table. All the profits generated by an LLC are taxed just one time. Referred to as the “pass-through” taxation principle, the profits earned by an LLC “pass through” the business entity into the bank accounts of each member of the LLC. This means the business does not pay corporate taxes because the profits generated by it spread out to the members that formed the LLC. Individual tax rates typically are lower than the tax rates assigned to incorporated businesses.
Activating an LLC
Because of the advantage called limited personal legal liability, forming an LLC is the most popular type of business entity. If you are interested in forming an LLC, you must file articles of organization with the state where you operate your business. An LLC operating agreement describes in detail the rights and responsibilities of each member that is part of an LLC.
Working with an attorney who specializes in forming LLCs is recommended for entrepreneurs that want to form the popular business type. Contact Cloud Peak Law Group to learn more about how to form an LLC in Wyoming.