Registering your business as an LLC vs. Sole Proprietorship
As a small business owner, there’ll be many decisions you have to make to get your business off the ground. Even before you meet your first customer, you’ll need to decide how to structure your business in order to register your company. How you decide to structure it will affect your registration requirements, tax payments, personal liability, and more.
In this article, we’ll cover the different types of business entities, which entities are ideal for small businesses, and how to decide which entity is right for you.
Types of business entities
Before registering your business, it’s important to understand the four different types of business entities. These four options are:
Sole Proprietorship: The simplest and least expensive form of a business entity. You’re the sole owner of the business and assume all liability for the company’s debts and legal obligations.
Limited Liability Company (LLC): When you register your business as an LLC, the business is considered a separate legal entity from yourself and is registered through the state. LLC members receive liability protection and avoid corporate taxes.
Partnership: Similar to an LLC, a partnership is a separate legal entity from yourself, but this form of ownership requires at least two owners. You can choose between a limited partnership (LP) and a limited liability partnership (LLP), which differ in the liability protection offered to partners.
Corporation: A corporation provides liability protection for its shareholders. A C-corporation, or C-corp, is separately taxed and has legal liability, meaning that profits from a C-corp are taxed once at the corporate level and once at the shareholder level.
Which entity is right for my business?
Once you understand the differences between each type of entity, it’s time to register your business. Most small businesses choose to register either as an LLC or sole proprietorship. How you register your business will depend on many factors ranging from how much you want to pay in taxes to what level of legal protection you’ll need.
What to know about LLCs
As we mentioned above, LLCs provide better legal protection for small business owners than a sole proprietorship. LLCs also have more tax flexibility. In fact, LLC members can choose how they want their business to be taxed. Whether the business is taxed as an S-corporation, C-corporation, or defaults to pass-through taxation, is entirely up to the owner.
In some cases, electing corporate tax status can save the business money. For example, dividends from the business are typically taxed at a lower rate than business income. Plus, corporations are more eligible for tax deductions and credit.
A few other advantages of registering your business as an LLC include no ownership restrictions––have as many owners as you want––and flexible profit distribution.
What to know about sole proprietorship
In a nutshell, registering your business as a sole proprietorship, rather than an LLC, is simply easier–some states don’t require you to register a sole prop at all. For states that do require registration, there’s very little paperwork involved, making this option attractive to small business owners who are either just getting their business started or don’t plan to grow past a one-person operation. Once the business has been launched, the sole proprietor only needs to keep up with business permits and taxes.
On the other hand, sole proprietorships require the business owner to assume much more liability than an LLC. With no legal protection for the owner or their assets, a bankrupt business could bankrupt the individual, too. So, whereas there’s less of a process when starting and registering the business, registering as a sole proprietorship could cause more work for the business owner in the long run.
Ready to register your business? Check out our comprehensive guide to get started or keep browsing our Small Business Guide.
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