The main difference between a Texas LLC and a sole-proprietorship is that a single member LLC in Texas will provide the benefits of financial separation and asset protection between your personal and business assets in most cases, while a sole proprietorship will not.
There are a few different business forms in the United States, but mainly those which fall between two designations, corporations and limited liability companies (LLCs).
Forming an LLC is a process that offers a business structure where the owners are given liability protection for their own property, away from the company’s debts or liabilities. This ensures that should a company go bankrupt, it will not disrupt that of the owner’s personal funds. This structure comes with certain requirements, including potentially drafting an operating agreement, understanding the fees associated with establishment, and managing taxes. LLCs also must file an annual report and can opt for an anonymous LLC setup for additional privacy.
Limited liability is one of the most obvious advantages of forming an LLC, but there are plenty of other benefits (and disadvantages) as well.
Sole proprietorship is essentially the same thing as one single person operating their business. It is also known as a sole trader or a proprietorship. Technically a sole proprietorship is an unincorporated business with only one owner. This person will pay income tax based on their personal profits earned from the business. LLCs actually benefit from this same form of pass-through taxation.
When working as a sole proprietor there are some advantages, but generally, it leads you open to more risk. For example, sole proprietorships are extremely simple to form. Your only legal requirement is to pay taxes and operate your business. One downside is that there is also the potential to pay more in taxes because everything you make is considered your income. Despite this, you are not required to pay any specific business taxes or unemployment taxes.
You are not given liability protection as a sole proprietorship. This can be very dangerous because your personal assets are at risk if you are sued. Overall, it appears more unprofessional and it can be difficult to find investors in the long run as compared to an LLC.
Although there are some similarities, there are many differences. Most often, sole proprietors own small or part-time businesses. They typically have no employees and run it themselves. You do not have costs to start a sole proprietorship, which is different from an LLC. LLCs combine characteristics of both a partnership and a corporation. LLCs offer the liability protection of a corporation with the tax advantages of a partnership.
Sole proprietors do not typically have a long process for setting up their business. This is because they are often one person who owns a small business. If you have no employees then you may not need to put money into starting an LLC. This can be great for new businesses who want low overhead. When you form an LLC you need to file various forms, pay fees, and adhere to regulations.
Since LLCs combine different parts of sole-proprietorships/partnerships, as well as corporations, you are getting the best of both worlds. LLCs, give liability protection which is incredible if you own personal assets or have a family to protect them. Sole proprietorships are not protected.
In Texas when you own a business as a sole proprietor, it is essentially the same as making income as an independent contractor. You will then need to report that income as a self-employed individual. This is done at your personal tax bracket level. It is a simple process and you will need to pay 15.3% for self-employment taxes as well.
When it comes to LLCs, you can elect taxation. This can be done as a sole-proprietor (but without liability risk), or as a corporation. Depending on your situation you may benefit from one more than the other.
Forming an LLC is often a great choice for businesses with employees, and for those with large incomes who wish to elect taxation. If you are just starting out with a minimal budget and want to keep your costs down, a sole-proprietorship may be a better choice.
In some states, single-member LLCs are not looked at as the same as multi-member LLCs. Texas is not one of these states, but if you wish to expand it is something to consider. Despite this, if you own assets, being a sole proprietor can be dangerous. Protect yourself and your progressing business with an LLC.