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As a small business owner, choosing your company's legal structure - whether a sole proprietorship or an LLC - is a vital decision. Being your own boss has lots of perks and upsides, but the downside comes through additional risks. Self-employed individuals have no one else to turn to if things go wrong and, in the worst cases, can expose their personal assets to liability.

Therefore, settling on a legal structure is crucial to understanding the risks your enterprise poses to you, your financial health, and your family. Many business owners debate the pros and cons of a sole proprietorship with themselves. However, you should educate yourself about the advantages and disadvantages of all the legal structures available to you.

Every legal business structure is governed by state law. Each location will have its own nuances that can affect whether a sole proprietorship, an LLC, or another form is particularly advantageous.

For many small businesses, structuring the company comes down to a straightforward choice: operate as a sole proprietorship or register as a limited liability company? The decision impacts your liability, costs, insurance needs, and flexibility, so you’ll want to make sure you make a wise choice based on your circumstances.

What Is a Limited Liability Company?

A limited liability company (LLC) is a form of legal business organization that, as the name suggests, lowers the liability for ownership. Every LLC registers articles of organization with the state government laying out the structure of the business.

These articles can include or refer to an operating agreement. This document contains a list of members, who are the owners of the business. The operating agreement also spells out:

  • Who has the power to act as an agent on behalf of the company.
  • How much each member invested in the operation.
  • What rights each member has to any profits or assets of the LLC.
  • Procedures for ending the LLC.

An LLC is not a partnership or corporation, which are other forms for organizing a business. The LLC also has distinct differences from a sole proprietorship. Further, you may be considering starting an S Corporation or C Corporation vs LLC. Both forms of corporations offer some advantages but have more complicated regulations to follow. You can learn more about S Corps and their articles of incorporation versus LLCs.

Finally, many LLCs have a formal, legal name as well as a doing business as (DBA) moniker. This is because most states require some combination of “limited liability” in the official name of an LLC. But a DBA is easier to sell and distinguish your company from competitors. For more information on LLC basics, check out our guide to ‘How to Start an LLC.”

What Is a Sole Proprietorship?

The default business structure in the United States is the sole proprietorship. Unless you choose to register your company in another way, the law will treat you as a sole proprietor.

A sole proprietorship is a business where there is one individual owner. In some states, a married couple can also own a sole proprietorship if they file taxes jointly. The owner has great flexibility in making decisions but is responsible for all operations, debts, liabilities, and other company risks.

Additionally, sole proprietors pay taxes on the business’s income themselves as individuals. While a sole proprietor can register for an Employer Identification Number (EIN) with the IRS, the owner reports the company’s profits or losses on their own individual tax returns.

Differences Between Sole Proprietorship and LLC?

There are crucial differences between sole proprietorships and LLCs. Your business’ legal structure will likely be determined by deciding what benefits you give more weight. There are distinctions between sole proprietorships and LLCs in the following areas:

  • Taxation
  • Liability
  • Legal implications
  • Day-to-day operating responsibilities
  • Costs
  • Regulatory Requirements.

Each of these areas may be significant in deciding which structure is better for your company. However, not all differences may be important to you, so be sure to focus on the issues that most affect your business.

Advantages and Disadvantages of an LLC?

The following table includes some essential advantages and disadvantages for a company organizing itself as an LLC.

Limited Liability Company
Advantages Disadvantages
Personal liability is limited to the amount you invested in the company. Regulatory burdens of complying with state and sometimes local LLC rules.
The operating agreement clearly contains rules for governing the business. Profits do not necessarily flow directly to you as a business owner and might need to be shared amongst members.
The LLC has tax flexibility: you can pay as an individual or corporation based on the situation. Additional costs over a sole proprietorship.

Advantages and Disadvantages of a Sole Proprietorship?

Like above, there are distinct advantages and disadvantages to organizing as a sole proprietor.

Sole Proprietorship
Advantages Disadvantages
Complete flexibility with very little government regulation. Personal liability for the company’s debts, even above what you have directly invested.
Income is yours to reinvest, cash out, or save as you see fit. No protection from creditors.
Little to no start-up costs, like filing articles of organization. Must pay self-employment taxes.

If you have any further questions or are ready to begin the process of forming an LLC, LawDistrict.com is here for you. We have all the answers you need and simple templates that can be tailored to your individual circumstances.


Start an LLC Agreement

FAQs About LLC and Sole Proprietorship

  • When Can a Sole Proprietor Become an LLC?

    At any time, a sole proprietor can file the necessary articles of organization, pay the required fees, and become an LLC.

  • Does a Sole Proprietor Need an LLC?

    It depends on your situation. If you have extensive personal assets separate from the business or operate in an industry with a large amount of risk, you should strongly consider forming an LLC. At a certain income level, operating as an LLC can also offer significant tax savings.

  • Is a Single-Member LLC Considered Self-Employed?

    The legal term the IRS applies to single-member LLCs is a “disregarded entity.” Therefore, for tax purposes, the federal government does not distinguish between the LLC and its only owner/member. However, if you are an LLC, you can choose to be taxed like a corporation. Sole proprietorships do not have this option.

  • Can an LLC Have One Owner?

    Yes, an LLC can operate with a single member. As the only owner, you need to take special precautions to not commingle personal and business funds.

As a small business owner, choosing your company's legal structure - whether a sole proprietorship or an LLC - is a vital decision. Being your own boss has lots of perks and upsides, but the downside comes through additional risks. Self-employed individuals have no one else to turn to if things go wrong and, in the worst cases, can expose their personal assets to liability.

Therefore, settling on a legal structure is crucial to understanding the risks your enterprise poses to you, your financial health, and your family. Many business owners debate the pros and cons of a sole proprietorship with themselves. However, you should educate yourself about the advantages and disadvantages of all the legal structures available to you.

Every legal business structure is governed by state law. Each location will have its own nuances that can affect whether a sole proprietorship, an LLC, or another form is particularly advantageous.

For many small businesses, structuring the company comes down to a straightforward choice: operate as a sole proprietorship or register as a limited liability company? The decision impacts your liability, costs, insurance needs, and flexibility, so you’ll want to make sure you make a wise choice based on your circumstances.

What Is a Limited Liability Company?

A limited liability company (LLC) is a form of legal business organization that, as the name suggests, lowers the liability for ownership. Every LLC registers articles of organization with the state government laying out the structure of the business.

These articles can include or refer to an operating agreement. This document contains a list of members, who are the owners of the business. The operating agreement also spells out:

  • Who has the power to act as an agent on behalf of the company.
  • How much each member invested in the operation.
  • What rights each member has to any profits or assets of the LLC.
  • Procedures for ending the LLC.

An LLC is not a partnership or corporation, which are other forms for organizing a business. The LLC also has distinct differences from a sole proprietorship. Further, you may be considering starting an S Corporation or C Corporation vs LLC. Both forms of corporations offer some advantages but have more complicated regulations to follow. You can learn more about S Corps and their articles of incorporation versus LLCs.

Finally, many LLCs have a formal, legal name as well as a doing business as (DBA) moniker. This is because most states require some combination of “limited liability” in the official name of an LLC. But a DBA is easier to sell and distinguish your company from competitors. For more information on LLC basics, check out our guide to ‘How to Start an LLC.”

What Is a Sole Proprietorship?

The default business structure in the United States is the sole proprietorship. Unless you choose to register your company in another way, the law will treat you as a sole proprietor.

A sole proprietorship is a business where there is one individual owner. In some states, a married couple can also own a sole proprietorship if they file taxes jointly. The owner has great flexibility in making decisions but is responsible for all operations, debts, liabilities, and other company risks.

Additionally, sole proprietors pay taxes on the business’s income themselves as individuals. While a sole proprietor can register for an Employer Identification Number (EIN) with the IRS, the owner reports the company’s profits or losses on their own individual tax returns.

Differences Between Sole Proprietorship and LLC?

There are crucial differences between sole proprietorships and LLCs. Your business’ legal structure will likely be determined by deciding what benefits you give more weight. There are distinctions between sole proprietorships and LLCs in the following areas:

  • Taxation
  • Liability
  • Legal implications
  • Day-to-day operating responsibilities
  • Costs
  • Regulatory Requirements.

Each of these areas may be significant in deciding which structure is better for your company. However, not all differences may be important to you, so be sure to focus on the issues that most affect your business.

Advantages and Disadvantages of an LLC?

The following table includes some essential advantages and disadvantages for a company organizing itself as an LLC.

Limited Liability Company
Advantages Disadvantages
Personal liability is limited to the amount you invested in the company. Regulatory burdens of complying with state and sometimes local LLC rules.
The operating agreement clearly contains rules for governing the business. Profits do not necessarily flow directly to you as a business owner and might need to be shared amongst members.
The LLC has tax flexibility: you can pay as an individual or corporation based on the situation. Additional costs over a sole proprietorship.

Advantages and Disadvantages of a Sole Proprietorship?

Like above, there are distinct advantages and disadvantages to organizing as a sole proprietor.

Sole Proprietorship
Advantages Disadvantages
Complete flexibility with very little government regulation. Personal liability for the company’s debts, even above what you have directly invested.
Income is yours to reinvest, cash out, or save as you see fit. No protection from creditors.
Little to no start-up costs, like filing articles of organization. Must pay self-employment taxes.

If you have any further questions or are ready to begin the process of forming an LLC, LawDistrict.com is here for you. We have all the answers you need and simple templates that can be tailored to your individual circumstances.


Start an LLC Agreement

FAQs About LLC and Sole Proprietorship

  • When Can a Sole Proprietor Become an LLC?

    At any time, a sole proprietor can file the necessary articles of organization, pay the required fees, and become an LLC.

  • Does a Sole Proprietor Need an LLC?

    It depends on your situation. If you have extensive personal assets separate from the business or operate in an industry with a large amount of risk, you should strongly consider forming an LLC. At a certain income level, operating as an LLC can also offer significant tax savings.

  • Is a Single-Member LLC Considered Self-Employed?

    The legal term the IRS applies to single-member LLCs is a “disregarded entity.” Therefore, for tax purposes, the federal government does not distinguish between the LLC and its only owner/member. However, if you are an LLC, you can choose to be taxed like a corporation. Sole proprietorships do not have this option.

  • Can an LLC Have One Owner?

    Yes, an LLC can operate with a single member. As the only owner, you need to take special precautions to not commingle personal and business funds.