LLC Compared to Sole Proprietorship
In a sole proprietorship, a single individual (the "sole proprietor") owns the business and manages it himself. A limited liability company ("LLC") will often have multiple owners, and provide those owners with some protection from personal liability for LLC operations. Those with specific questions about choosing a business entity should consult an attorney or tax professional.
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Formation
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Formation of a sole proprietorship is much simpler than formation of an LLC. A sole proprietorship basically begins operating any time an individual offers goods or services in a business setting; this individual is now a sole proprietor. Some counties or cities will require sole proprietors to hold a business license. However, an LLC usually must register with the Secretary of State of the applicable jurisdiction, and the LLC's members must create a membership or operating agreement, which will then govern the operation of the LLC.
Legal Existence
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Some business entities, such as corporations, exist legally even if all of the owners of the business depart. However, a sole proprietorship does not exist independently of its sole proprietor. Should the sole proprietor die, for instance, that is the end of the sole proprietorship. By contrast, the legal existence of an LLC is defined by its operating agreement. The members can stipulate in the agreement that the LLC continues despite the departure of individual members.
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Transfer of Interest
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Due to the individual nature of ownership interest in a sole proprietorship, transferring or selling the sole proprietorship business often will involve creation of a new business entity under the new owner or owners. The ability to transfer an ownership interest in an LLC is governed, like everything else, by the operating agreement. LLC ownership interests vary widely. Some LLCs allow easy transfer, but many LLCs stipulate that any transfer of interest must be approved by the remaining members of the LLC.
Liability Protection
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Sole proprietorships do not offer protection from business liabilities. Because the sole proprietor is identified personally with his business, he will be held personally liable for any business obligations (these can include legal judgments, debts, liens and other forms of liability). Creditors can come after the sole proprietor's personal assets (such as home and belongings) to satisfy these obligations. After an LLC has completed valid formation, it enjoys a shield from liability similar to the corporate form. The members of an LLC are only personally liable for the amount they have invested in the LLC. Their separate personal assets cannot be attached or seized to satisfy LLC obligations.
Taxation
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LLCs enjoy "pass-through" taxation, meaning that despite the presence of the business entity, the owners are taxed personally on the business's profits and losses. Unlike a corporation, which must pay corporate taxes before the owners also pay individual taxes on their share of the profits, the typical LLC form allows the owners to pay taxes only once on their personal distributions from the business. Sole proprietors likewise only need to pay taxes individually on the profits from their business, usually via a Schedule C from the IRS. In some cases, individual owners also can deduct their business expenses. Different states will have different tax forms for these two types of businesses.
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