The main difference between a Nevada LLC and a sole proprietorship is the way that the two structures handle tax and the way that they handle liabilities within the organization. It’s important that business owners understand the differences between these two very different business structures before they register their businesses in the state of Nevada.
In this article, we’ll explore the differences between an LLC and a sole proprietorship in Nevada and consider which structure might be better depending on the needs of your business and the key figures within it.
An LLC, or a limited liability company, is a type of company structure that limits the amount of personal liability that business owners and agents have because of their role in the company. If an ex-employee sues an LLC for whatever reason, the company’s partners cannot be held personally liable for the claim. They also can’t be held personally liable for debts in the company’s name.
As well as protecting owners from personal liability, LLCs are taxed as ‘flow-through’ entities, which means that LLCs are not double-taxed, instead allowing owners to pay only personal income tax on the profits that the company makes.
By starting an LLC, entrepreneurs can protect their own assets and savings and separate these from the company coffers. It’s a popular choice of entity for many small businesses because of the protections and flexibility that it offers. You can start an LLC even if you’re a sole business owner, making this an ideal entity choice for many different start-ups.
When you set up an LLC in Nevada, you may have to choose how to structure your LLC. If you’re a sole owner, you will set up a single-member LLC which is an LLC with only one member who is also the manager of the LLC.
If you set up an LLC with multiple members, you must decide whether to set up a member-managed LLC or a manager-managed LLC.
A member-managed LLC means that all of the members of the LLC participate in decision-making, and the company requires the majority approval of all its members when entering into new contracts and making other key decisions. LLCs in the US are member-managed by default unless formation documents state otherwise.
If you choose to form a manager-managed LLC, all members must agree that a particular member or members of the LLC manage the company. It’s also possible to nominate a third party to manage the LLC. The manager is responsible for making key decisions and managing daily operations.
When considering whether to form a sole proprietorship vs LLC entity, weighing up the pros and cons of setting up each type of company can help you to decide which is a better structure for your business. Setting up an LLC has advantages and drawbacks, although for most start-ups the advantages far outweigh the disadvantages.
The advantages of setting up a Nevada limited liability company include:
The disadvantage of setting up an LLC is:
A sole proprietorship, which is sometimes called a sole trader, is a type of unincorporated business entity with a single owner. Most small businesses across the US are sole proprietorships, and they’re popular because they’re very easy to set up and they allow all of the business’s income to be reported as income for the sole business owner.
Operating as a sole proprietorship really just means that you are doing business by yourself. There are no protections offered by the structure nor does it carry any added formalities or complexities.
There are pros and cons to setting up a Nevada sole proprietorship, which it’s important to consider before choosing to operate under this structure.
Some of the advantages of setting up a sole proprietorship include:
Some of the disadvantages of operating as a sole proprietorship include:
When you’re forming a start-up, think carefully about the differences between sole proprietorships and LLCs. Sole proprietorships are usually small or part-time businesses with no employees and no plans for expansion. They’re suitable for sole traders offering simple services on a freelance basis. It doesn't cost any money to establish a sole proprietorship, which makes this structure ideal for casual business owners.
An LLC is a more formal type of entity that combines the properties of a partnership and a corporate formation. They offer the liability protection that corporations have alongside the taxation flexibility of partnerships.
The state of Nevada recognized both single-member LLCs and multi-member LLCs, which means that both LLCs and sole proprietorships are valid options for sole traders wanting to operate as a business in Nevada. Remember that a single-member LLC is not the same as a sole proprietorship.
The start-up process differs somewhat depending on whether you operate as an LLC or a sole proprietorship.
When you first start operating, a sole proprietorship is easier to set up than an LLC. It costs nothing and requires no paperwork to set up a sole proprietorship. However, if you want to grow your business, it can be harder to secure funding as a sole proprietorship than an LLC because of the lack of credibility and protection that sole proprietorships have.
On a daily basis, managing and operating your business could be quite similar. If you run a single-member LLC or a sole proprietorship, this means that you’re in charge of all of the key decisions that need to be made for your business. If you run a multi-member, member-managed LLC, you may have to meet with the other members of the LLC regularly to make decisions that relate to the business.
If your business is held liable either for wrongdoing in the eyes of the law or for outstanding debts, whether or not you’re operating as an LLC or a sole proprietorship will make a big difference to the process. Sole proprietors are liable for their business’s liabilities and debts, while LLC members aren’t. This means that if you run a sole proprietorship, you could have to use your own savings and assets to settle company debts.
The way in which LLCs and sole proprietorships are taxed is one of the biggest differences between these two types of entities. In either case, we strongly recommend partnering with the proficient professionals at Bench. As your reliable ally, Bench is ready to assist you in organizing your financial records, optimizing deductions, and ensuring a smooth and efficient filing process for the current year.
If you operate as a sole proprietor, you’ll be taxed just as you would be if you were self-employed. This means that your business income is treated as personal income when you're taxed. There is no flexibility on how a sole proprietorship is taxed.
If you operate as a Nevada LLC, you may elect to be taxed as a disregarded entity, a partnership, or corporation, or an S-corp. If you don’t elect to be taxed otherwise, you’ll be taxed as a disregarded entity or as a partnership - this depends on the number of members your LLC has.
Accurate Financials. Total Peace of Mind.
Save time and money on bookkeeping and income taxes with Bench’s experts & software.
If you’re considering whether it’s better to form an LLC or a sole proprietorship in Nevada, it’s valuable to weigh up the pros and cons of each and consider not just what’s best for your business now but what might be best for your business over the coming years.
LLCs are best for small and medium businesses with one or multiple members where tax efficiency and liability protection are a concern. If your business makes enough profits to take you over the threshold for income tax, you may be able to reduce the amount of tax that you pay in total by forming an LLC. Larger businesses almost always benefit from the increased tax flexibility offered by this entity type.
If you’re trying to expand your business, it’s easier to secure funding as an LLC and if your business takes out expansion loans or debts you are still personally protected when you run an LLC. If you have intentions to grow your business in the future, an LLC is definitely a better option than a sole proprietorship.
Sole proprietorships are best for very small businesses with only one member and without any employees. If you’re a sole trader wanting to earn money as a freelancer or a start-up, you could choose to operate as a sole proprietor or as a single-member LLC. You may decide to change from a sole proprietorship to an LLC later on if you want to expand your business, protect yourself from liabilities, or if you make enough income to benefit from more flexible taxation options.
There isn’t a huge difference between the way LLCs operate in Nevada compared to other well-known business states such as Wyoming, Delaware, and New Mexico. All four of these states offer favorable laws that attract a lot of new business.
Nevada’s laws are most like those of Wyoming because Nevada’s LLC Act was written to mirror many of the protections offered to businesses in Wyoming, including Wyoming’s anti-creditor laws. In comparison, New Mexico offers fewer protections and Delaware is more suitable for larger corporations.
However, Nevada does charge slightly higher fees to register and operate an LLC compared to some of these other states, most notably New Mexico. It costs $300 to register an LLC in Nevada compared to just $50 in New Mexico, and you must also pay $200 per year in annual fees in Nevada.
You can read more about the differences in taxation, laws, fees, and privacy between these four states in our article on forming an LLC in Nevada, Delaware, Wyoming and New Mexico.
Are you looking for affordable, expert lawyers who can help you to launch your business in Nevada or other states? At Wyoming LLC Attorney, we help entrepreneurs form and operate their start-ups in a safe, compliant, and tax-efficient way. All of our fees are transparent and all of our attorneys are fully experienced and qualified.