The main differences between a Delaware LLC and a Delaware sole-proprietorship are tax savings and privacy. The tax savings eventually excess the cost of formation. If you form your LLC anonymously, then a Delaware LLC can provide complete anonymity.
In the United States, there are various forms of business structures. Two of the most commonly formed by smaller businesses are Limited Liability Companies (LLC) and sole-proprietorships. The sole proprietorship is essentially one person as a business entity. An LLC is a business structure that allows one, two, or more owners to maintain no personal liability for the company's debts or liabilities.
Advantages & Disadvantages of LLC
When it comes to the disadvantages of an LLC, it truly is that there is more complexity versus a sole proprietorship. LLCs offer a host of advantages and are typically a smart choice.
Advantages of an LLC include:
- Tax savings: These often eventually pay the business back for formation costs.
- Liability protection: Prevents your personal assets from being seized if your business is sued.
- Privacy: If formed anonymously, an LLC can provide complete anonymity, keeping your personal life private.
- Professional appearance: Rather than enter into business transactions as yourself, you can enter with “LLC” at the end of your business name.
- More tax flexibility: LLCs can elect taxation as a corporation, sole-proprietorship, or partnership.
What is a Sole Proprietorship?
Also referred to as a sole trader or a proprietorship, the sole-proprietorship is an unincorporated business that has one owner. As a sole-proprietor, you will be required to pay personal income tax on profits that are earned from your business.
Advantages & Disadvantages of Sole Proprietorship
The main disadvantage to a sole proprietorship is that there is unlimited liability. There is no separation between you and the business. Although you are entitled to all the profits, you will also be liable for the debts and obligations. This means that can even be held responsible for the liabilities of employees.
It can also be difficult to raise money as a sole proprietor. If you do not seem professional and seem like a “one-man show” you may not be taken as seriously.
The main advantage of acting as a sole proprietor is the potential to keep more in taxes. This is due to everything that is earned is income, and you will pay taxes based on your personal tax liability.
Sole Proprietorship vs LLC
Most often sole proprietors own small businesses. These are also commonly a part-time venture, but almost always have no employees. Because it costs nothing to establish a sole proprietorship, it is a simple process.
LLCs are a hybrid of a sole proprietorship and a corporation. This means that there is more work that goes into the formation of it. With a variety of paperwork and processes filed in Delaware, it can be a lot more work. Despite this, all of that work allows the liability protection of a corporation with the tax advantages of a partnership.
Funding
When it comes to funding, it can be hopeful to have your business set up as an LLC. That is because it will be a separate legal entity. Separating your personal income and business income can provide you with legal protection as well, to help keep your assets safe. As a sole proprietor, you run the risk of not being able to obtain funding, while it can be much easier to do so under the name of an LLC.
Taxation
Operating your business as a sole proprietor means you will simply be taxed as a self-employed person. This also means that all the income that comes from your business is considered your personal income. For tax purposes, you will be taxed at your personal taxation rate.
As an LLC, you may make an election to be taxed as a disregarded entity, partnership, corporation, or s-corp. If you do not make an election, then you will be taxed as a disregarded entity (meaning a sole proprietorship), or as a partnership. This all depends on how many members are part of the LLC.
Should You Start an LLC or Sole Proprietorship
Forming an LLC is a good option for those who have assets and want to protect them. Although an LLC is often a good choice, sometimes the costs that go along with an LLC make a sole proprietorship a better choice for your business.
If your business is a side hustle or part time business with no employees, a sole proprietorship may be the way to go. If there is any chance that you may need to protect your personal assets due to the possibility of being sued, then forming an LLC can provide you that protection. Additionally, if you are looking to maintain anonymity, an LLC provides the opportunity to stay that way.
The final aspect to take into consideration when choosing whether to form as an LLC or sole proprietorship in Delaware, is how it is seen in the courts. Some states do not look favorably on single-member LLCs.
Although Delaware treats all single member LLCs as a “disregarded entity” and as a sole proprietorship for tax purposes, it is still something to think about. Typically this can come up in legal proceedings, regarding which interests you are protected against. By contacting a business attorney you can make the best decision for yourself and your business.
