When forming their enterprise, small-business owners often must choose whether they wish to operate as a sole proprietorship or a limited liability company. Those who wish to keep the operation and structure as simple as possible may elect to operate as a sole proprietorship. However, the LLC may offer some advantages that are not available to a sole proprietor.
The LLC offers greater protection from creditors than a sole proprietorship. With a sole proprietorship, the business's creditors are legally entitled to pursue the owner's personal assets via lawsuit if she is unable to meet the business's financial obligations. With the LLC, any personal assets are off-limits to creditors. Thus, if the entrepreneur holds a large number of personal assets, the LLC is probably a better choice.
A sole proprietorship is typically easier to form than the LLC. A sole proprietor is not required to fill out any formal documents to get started, although he may need to register a fictitious business name if he chooses to use one, and he may also elect to obtain an employer identification number if he does not wish to use his own Social Security number. The LLC must be registered in accordance with state legal requirements, which can cost several hundred dollars to fulfill.
Ownership Structure and Duration
As its name implies, a sole proprietorship can only have one legal owner. The LLC offers a variety of ownership structures. It can operate like a sole proprietorship with only one owner, or it can function more like a partnership with a number of owners who are referred to as members. The members may also decide to allow non-members to manage the day-to-day operations of the LLC. A sole proprietorship ends with the death of its owner, while the LLC may end on a predetermined date or exist into perpetuity, depending on state law.
A sole proprietor does not file a separate tax return. Instead, she declares all business profits and losses on her personal income tax return by filing Schedule C. The LLC has the flexibility to function as a sole proprietorship, partnership or corporation and files its taxes accordingly. If it chooses to operate as a corporation, it needs to file taxes as a business, which may or may not prove advantageous for its members.