Free BOI/CTA filing for all clients. Receive your LLC, EIN, and bank account SAME-DAY. Learn more.

By The Wyoming LLC Attorney Team

Feb 11, 2023
Home
  1. LLC vs. Sole-Proprietorship

Pennsylvania LLC vs. Sole-Proprietorship

How to Start an LLC

Summary

Pennsylvania LLCs and sole proprietorships have distinct differences, impacting your business setup and tax matters. An LLC provides liability protection, tax flexibility, and funding options. In contrast, a sole proprietorship may have lower setup costs but limited funding avenues and no liability protection. Choosing between them depends on your business size and risk level.

The main difference between a Pennsylvania LLC and a sole proprietorship is that the latter is run by just one person, while the former can have multiple owners or members who are in charge. Read on to find out more about what LLCs and sole proprietorships are and how they differ.

What Is an LLC?

An LLC, or limited liability company, is a type of business in America that means the owner of the company is not liable for any monetary losses or debts that the company accrues. This model offers protection for business owners.

There is a further variation of single and multi-member LLC options.

  • A single-member limited liability company is a better option when it comes to tax since it means there is no need for a federal tax return, except in the instance that your company chooses to be seen as a corporation for tax reasons.
  • In comparison, a multiple-member LLC does have to file a tax return. As well as, you must provide K-1 forms to your members which have to be filed alongside your returns.
Start an LLC in Pennsylvania

Disadvantages of an LLC

There are very few disadvantages to a limited liability company. The only difficulty you may face if you choose this route is a certain level of extra complexity.

Advantages of an LLC

On the other hand, the advantages of opting for an LLC are much longer.

  • Choosing a limited liability company means that you get tax benefits including savings which could cover your formation costs.
  • You will also have more tax flexibility.
  • You will have liability protection meaning that if there are any claims made, you are covered.
  • If you form the LLC anonymously then you can benefit from a much higher level of privacy.
  • An LLC is also a good option if you want to present as more professional.

What Is a Sole Proprietorship?

A sole proprietorship, also known as a sole trader, is a type of business owned by a single individual, rather than a company or a limited liability partnership. There is just one owner in charge who is responsible for paying any personal income tax on the profits that the business takes in. This implies that there are no partners involved in the company.

Disadvantages of Sole Proprietorship

If you run your business as a sole proprietorship, there is the issue that you could end up paying more when it comes to taxes. This is due to the fact that everything that you earn would count as income. Additionally, raising funds as a sole proprietor can be challenging. Opting for this setup poses a risk due to the owner's unlimited liability.

As a result, you are at risk of losing all of your own personal assets if anything goes wrong, for example, if your company is sued. In addition to other challenges, operating as a sole proprietorship may not always project a professional image, potentially impacting your business's reputation.

What Is the Difference Between LLC and Sole Proprietorship?

There are a lot of differences between limited liability companies and sole proprietorships, and these can alter the way you run your business, set it up, and pay your taxes. Ordinarily, if you have a sole proprietorship then you are in charge of a small business that doesn’t have any employees. Part-time businesses fall under this category. One of the main benefits of this is that it doesn’t cost you anything to set up a sole proprietorship.

In contrast, an LLC is a mix between a partnership and a corporation. Due to this, an LLC benefits from liability protection since it is a corporation but also tax advantages since it is a partnership. If you set up your company as an LLC, you can enjoy all of these benefits, and it is still possible even if you want to run your business as a single person. To do this, you will need to register as an SMLLC, a single-member limited liability company. While Pennsylvania allows this option, it is still advisable to have an operating agreement, although it does not necessarily need to be submitted to the state.

How Does the Startup Process Differ?

There are also more ways that the two differ when it comes to starting up. Explore a few key differentiators between LLCs and sole proprietorships.

Startup Costs

When it comes to initial investment, a sole proprietorship is a good idea. Choosing this option means that there are fairly minimal set-up costs. It is actually said to be one of the least expensive kinds of business that you could start.

Starting an LLC also means paying a small price, but this could be quite minimal too. You can expect to pay anywhere from $50 to $200 for a professional to handle all of the setup tasks for you.

Funding

An LLC offers better funding opportunities compared to a sole proprietorship, which largely relies on personal assets, savings, loans, or alternative income sources such as retirement funds.

When you have a limited liability company, on the other hand, you can source funding from a whole variety of avenues. Some options that you might want to consider include:

  • Evaluate your own assets and sell, liquidate, or take out loans where possible. Be wary of repayment requirements with this option.
  • Get in touch with your own network of contacts to ask for less formal loans. To avoid causing conflict, ensure that you only ask for or accept loans that you can pay back.
  • Invite new members to join your LLC team who can help you to amass funds and resources. This can also offer you a wider range of experience and knowledge.
  • Consider credit cards which could provide you with short-term funding. You could benefit from looking into business credit cards since there are additional perks to these that could suit your purposes. They are also more inclined to grant you credit promptly and with reduced paperwork requirements.
  • There are a range of grants and loans available from the government if you have an LLC which can provide you with some great opportunities to receive funds for your business.

Managing and Operating

If you have an LLC, you have the right to manage your business or company however you like. You can manage it yourself or hire a manager and establish your own team hierarchy.

With a sole proprietorship, as the sole owner, you have entire control and the power to make whatever decisions you want about the running of the business. You are entitled to make any choice you decide. Depending on your business, either of these options could work for you.

Liability

When it comes to liability, opting for an LLC is the ideal choice. It shields you from potential lawsuits and ensures a protective barrier between your personal assets and any financial loss.

In comparison, if you have a sole proprietorship, then you have unlimited liability. This means that if anything goes wrong with your business or if for any reason your company is sued, then your personal assets can be claimed and you may end up losing all of your funds as well as personal items.

LLC & Sole Proprietorship Taxation

Tax works differently depending on whether you are an LLC or a sole proprietor. This is another factor that can make a difference when it comes to deciding which option is best for you.

As a sole proprietor, you will be seen as a self-employed person and need to file your taxes in accordance. All of the income of the business is seen as your own personal income and it will be treated this way when it comes to tax matters.

In comparison, an LLC can decide to count their tax as a disregarded entity, as a partnership, as a corporation, or as an S-corp. This is up to the company to register. However, if you do not elect one of these for your company, then you will be taxed as a disregarded entity or as a partnership. This will be decided based on how many members you have in your business.

bench

Accurate Financials. Total Peace of Mind.

Save time and money on bookkeeping and income taxes with Bench’s experts & software.

Learn More

Should You Start an LLC or Sole Proprietorship in Pennsylvania?

A Pennsylvania Limited Liability Company is the best option when it comes to medium or even high-risk businesses. They are largely useful if you want to make sure that your own personal belongings are not at risk of being seized if anything goes wrong with your business.

A Pennsylvania Sole Proprietorship is best suited for those who are looking to set up a smaller business. A sole proprietorship is also most beneficial if you have a very low risk or low profits. Additionally, if you prefer to avoid extensive legal filings, then a sole proprietorship is the more straightforward option for you.

Advantages of Switching From a Sole Proprietorship to an LLC

If you have already registered your business as a sole proprietorship but you are now wondering if an LLC would be a better fit, it is not too late! You can still switch your business over to a limited liability company. Read on for some of the benefits of switching your company from a sole proprietorship to an LLC.

Separates your personal assets

Having an LLC means that you have much more protection when it comes to your own belongings. This is especially important if you have a family or others that are relying on you. You must consider the importance of your personal assets and make sure that they are protected – something that they will be if you opt for an LLC.

Protect yourself from lawsuits

In case of any issues or lawsuits against your company, the debts and liabilities are contained within the company and do not pose a threat to your personal assets. Separating your personal assets from your business is a fundamental step. This is part of the reason it is so essential for medium and especially high-risk businesses to switch to LLC.

How to Switch to a Limited Liability Company

The rules on law and business are very different from state to state so it is important to abide by the laws of Pennsylvania if you are planning to change anything about your business. Ordinarily, you will be required to fill out the appropriate paperwork which will be similar to that of anyone else setting up an LLC from scratch.

After filling in the right documents, you might find that you must cancel your trade name under the sole proprietorship or DBA before you will be able to set up an LLC. After this, it may be possible to keep the business name the same but this is something you will need to check throughout the process to ensure you are following the law.

Next, you will need to choose a registered agent, make sure to file articles of organization, and draw up an operating agreement. These are all standard requirements of an LLC. You will also need to ensure that your business has an EIN, an Employer Identification Number since this is a key part of making sure that your taxes run smoothly.

Finally, you must make sure to keep all of your sole proprietorship's bank accounts up to date as well as any accounts, registrations, contracts, or anything else just to ensure that everything is tidied up correctly. Then, you can continue operating with all of the benefits of being a limited liability company in Pennsylvania.

Your Responsibilities as an LLC Owner

Once you have switched over your company, you need to be aware of how things will be different for you. Firstly, you will need to scrutinize any contracts that you already hold and make sure to correctly assign any responsibilities you had previously to your new role within the business. Otherwise, you will need to make new arrangements. Your new tasks and responsibilities will need to be stated in your operating agreement for the LLC. Generally, this should include things like acting in good faith and performing with reasonable care your responsibilities.

If you have any further questions or uncertainties about starting your own limited liability company or more general business questions, make sure to get in touch and our friendly team will be able to give you any advice you need to get started on your business journey. You can either fill out the contact form or dial +1 (307) 683-0983 to connect with us.