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What is the difference between sole proprietorship and LLC?

On Behalf of | Jan 31, 2020 | Business & Commercial Law

If you are starting a new business, you have a lot of decisions to make in a short amount of time. One of the more important aspects to decide on is if your new business is going to be an LLC or a sole proprietorship. Unfortunately, there is no easy answer on which one to choose: they both have pros and cons. According to SCORE, an LLC costs more than a sole proprietorship to maintain, but in some circumstances the initial costs are worth it in the long run.

For instance, sole proprietors do not need to register with the state if their company includes their first and last name. With a single-member LLC, however, you are going to need to file paperwork called “Documentation on Articles of Organization.” This costs more money.

However, there is no separation between a sole proprietorship and the business entity. This means that the actual business owner is the one that is held responsible for all debts or legal actions taken against the company. If the business goes bankrupt, the owner’s personal assets may be taken to settle the debt.

In a single-member LLC, the business is a separate legal entity from the actual owner. This means that if the business goes bankrupt, the owner’s personal property will not be remanded.

The same thing goes for income taxes. With the sole proprietorship the owner is the business, and the business will be taxed at the same rate as the individual. With an LLC, the company is a “disregarded entity” and will be taxed either as an S Corp or a C Corp. (Most business owners find S Corp taxation more attractive.)