New Mexico LLC vs. Sole-Proprietorship

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What is an LLC?

A limited liability company (LLC) is a business structure in the United States set up so that the members are not personally liable for the company's debts or liabilities.

New Mexico LLC Benefits

There aren’t a lot of disadvantages to starting an LLC aside from a little more paperwork, fees, and filing with the state. In New Mexico, however, there is no requirement that LLCs file annual reports or pay annual fees.

Advantages of an LLC

  • Tax savings: Businesses can take many deductions when filing year end taxes and the money that is saved this way can be used to pay any applicable fees.
  • Liability protection: If someone files a lawsuit against your company or sues you, it is only the business that can get hurt, not you personally
  • Privacy: Some people wish to form their LLC anonymously in which case there will be no name on file with the state giving you greater distance between your personal life and your business
  • More professional: An LLC helps your business look more professional to customers and colleagues
  • More tax flexibility: An LLC offers tax options for filing that simply filing as an individual does not


Disadvantages of an LLC

  • Upfront costs: Requires fees, paperwork, and filing with the state
  • Future costs: Overall cost of accounting and taxes can be higher

What is a Sole Proprietorship?

A sole proprietorship, sometimes called a sole trader or a proprietorship, is a business structure in which there is only one owner who has to pay personal income tax on profits earned from the business and the business remains unincorporated.

Advantages & Disadvantages of Sole Proprietorship

On the surface there are potentially a lot of disadvantages to having a sole proprietorship, though depending on the purpose and structure of your business, their effect may be negligible.

Advantages

  • Low costs: No required paperwork, filing, or fees, and you don’t have to pay business taxes
  • Ease: The startup process is simple

Disadvantages

  • Higher taxes: Since all money is considered “earned income” this could create more owed in taxes
  • Unlimited liability: As a sole proprietor, you are the same as your business in the eyes of the law and anything that happens to it happens to you too
  • Limited income: Some investors will choose not to finance sole proprietorships since they are viewed as less professional
  • Unprofessional: Depending on your business, some banks won’t lend to you since it would be considered a personal loan instead of a business loan

LLC vs Sole Proprietorship: What’s the Difference?

While both an LLC and a Sole Proprietorship are simple ways to set up and structure your business, they should not be thought of as interchangeable. Generally speaking, a sole proprietorship is good for a single person with a hobby or small business without much prospect of growth or adding employees. It is very easy to set up a sole proprietorship in New Mexico and can be done without filing legal paperwork with the state.

On the other hand, an LLC must be applied for with the state, and you are required to keep up any fees and requirements to stay in compliance. In New Mexico, however, there are no annual maintenance fees or filing requirements for LLCs. LLCs are good for businesses who want to have a more professional face, who have or may have more than one member, and whose members want to protect their personal assets from the liability of the business.

Which is easier to Start?

To start a sole proprietorship in New Mexico there’s really not much you have to do. If you want to choose a business name that is different from your name, you should file it as a trademark with the Secretary of State. If your business name is just your name or last name (ex: Jane Smith’s Tree Services), you can just start using it. If you plan on having employees or if you want to err on the side of safety, you can obtain an EIN (Employer Identification Number) to file taxes with.

To start an LLC in New Mexico you must choose a name and ensure no other LLC in the state has the same name, choose a registered agent who will be responsible for receiving all communication from the state, and draft and submit Articles of Organization with the state along with a filing fee of $50.

LLC & Sole Proprietorship Taxation

With both an LLC and a Sole Proprietorship you may file your business taxes through your personal taxes. In a sole proprietorship, the money you make from your business is viewed as self-employment income and all your business income is considered personal income. An LLC’s income can also be passed through a member’s personal taxes, but they also have an option to elect to be taxed as a corporation, s-corp, or partnership. This designation allows the LLC to take corporate benefits that an LLC cannot such as reducing self-employment taxes.

Should You Start an LLC or a Sole Proprietorship?

If you are a single person with a hobby that you’re interested in making money off of, or if you have a small part-time business where you are the only employee, it might make sense to start a Sole Proprietorship for the ease of maintenance and tax filing.

If you have or want to have a more established business with potentially more employees, it’s best to start an LLC to shield yourself from any future liabilities. Even if you are the only member of your LLC, it can benefit you. The extra costs for setting it up and maintaining it will usually pay for themselves in the tax benefits.



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