Limited liability companies are a business structure in the United States that provides liability protection. Essentially, an LLC separates the personal finances of a business (member) owner, from the LLC. When an LLC is formed, the owners will not be personally liable for any of the company's debts or liabilities.
Advantages & Disadvantages of LLC
When it comes to forming an LLC, the only true disadvantage is the complexity of formation and operating. There are formation costs, and you must form specific guidelines regarding operating. Despite this, there are a huge number of advantages when it comes to forming an LLC.
LLCs offer pass-through taxation, which means that you can avoid the business paying taxes, and those taxes are passed on to the owners (members). The tax savings that occur because of this are huge, and can even pay for the formation costs.
If formed anonymously, then you will be afforded personal privacy under an LLC. This can allow you to make controversial business decisions without recourse or simply operate under your business name while keeping your identity private.
The most well-known benefit of forming an LLC has to do with liability protection. Forming an LLC means that if your business is sued for any reason, the court cannot come after your personal assets. This provides you a safe space to do business without risking your personal livelihood.
Forming an LLC provides you a professional appearance. Often if you are sole-proprietor or partnership it can be difficult to obtain a business loan, which is why the guise of the LLC can come in handy as well.
LLCs can elect how they are taxed. Whether you choose to be taxed as a sole-proprietor/partnership, or as a corporation, LLCs can elect this based on what benefits the members the most. If the members of the LLC make a large amount of personal income, it can benefit them to be taxed as a corporation instead of as a sole-proprietorship.
What is a Sole Proprietorship?
Also referred to as a sole trader or a proprietorship, a sole proprietorship is a business with one single business owner. Sole proprietors are unincorporated businesses. The single-owner will pay personal income tax on profits earned from the business.
Advantages & Disadvantages of Sole Proprietorship
There are both positive and negative aspects of a sole proprietorship. Overall a sole proprietorship offers unlimited liability. If you are sued, your personal assets are at risk. There is also the potential to pay more in taxes because everything is being reported as earned income.
Sole proprietors are often not taken as seriously as well. Without a professional name, a sole proprietor can look simply like a single person doing business (which is essentially true). This makes it difficult to grow, or raise money.
The positive aspect of a sole proprietor is the lack of required paperwork to form. Apart from industry-specific licenses, you can simply set up shop and begin generating income. There are also no annual state filings, and you are only responsible for personal federal, state, local self-employment tax and FICA taxes.
Sole Proprietorship vs LLC
Generally, sole proprietors will operate small or part-time businesses with no employees. Starting a sole proprietorship is completely free, but it does not afford any of the privileges of an LLC.
An LLC is a hybrid of the partnership and corporation. With the liability protection of a corporation, an LLC also offers the tax advantages of a partnership.
A sole proprietorship is simple to form, simply book clients, or sell products. LLCs require you to name your business, file this name, choose a registered agent and elect taxation.
Managing and Operating
Running a sole proprietorship is simple, find clients, track income for tax purposes, and keep it in a separate location. You can make all of your own decisions as you are a single owner and manager.
When it comes to an LLC, you have the opportunity to have additional owners. LLCs typically have strict guidelines when it comes to operation. Although this takes the pressure off of a single owner, you do need to be able to work according to those guidelines and abide by them.
Funding is essential for any business, but a lot easier to obtain when you are an LLC. Most often, lenders will not be looking to approve a business loan if don’t have a business bank account, and you cannot obtain a business bank account as a sole proprietor.
The largest difference between an LLC and a sole proprietorship is the liability and legal protection awarded with an LLC. If you form as a sole proprietor then your personal assets are fair game should you be sued. To keep your personal assets safe, you must form an LLC.
LLC & Sole Proprietorship Taxation
If you operate your business as a sole proprietor, then you will be taxed as a single, self-employed person. The income that you earn is considered your own income, and you will report it as personal income to the IRS.
When it comes to an LLC, you may make an election to be taxed as one of four entities: disregarded entity(sole proprietor), partnership, c-corporation, or s-corp. If you do not make an election, your LLC will automatically be taxed as a disregarded entity or partnership, depending on how many members the LLC has.
Should You Start an LLC or Sole Proprietorship in Florida
Choosing to form an LLC versus a sole proprietor is a personal decision. The protections you can enjoy with an LLC are essential if you hope to protect a large number of personnel assets. On the other hand, if you are running a side business, you may not need to spend time on the additional fees, and paperwork. Overall an LLC gives you flexibility, but if you are a single person who does not need to elect a different form of taxation, a sole proprietorship can be just fine.