LLC vs. Sole Proprietorship vs. Corporation
You might be just starting out or you could be well on your journey, but regardless of where you are, how you legalize your business is one of the most important decisions that you’ll make. It affects everything from how you file your taxes to how any potential problems would be handled in court. So, saying that it’s important might even be an understatement.
The trouble is that the average small business owner doesn't understand the legal designations for business structures. And, why would you? Unless you studied to be a CPA or a lawyer, chances are that your realm of expertise is well outside the world of LLCs and S Corps. There’s no substitute for advice from a professional, but this will give you a good idea of what option is the best fit for both you and your business.
Sole Proprietorship vs. LLC vs. Corporation
What is a Sole Proprietorship?
A Sole Proprietorship is an unincorporated business entity with a single owner, who basically operates the business as an extension of themselves. Come tax season, if you opt to form a sole proprietorship, the profits and losses for your business will be gauged through your personal tax return. It is the least expensive and easiest business entity to form, and the IRS estimates that there are about 24 million businesses operating as sole proprietorships in the US right now.
Being the cheapest and the easiest business entity has obvious upsides, but there is a price to pay. And, that price is liability. Because you and your business operate as one entity, you are personally responsible for all debts and accountability. This means that should your business fall into debt or should someone sue you, your personal assets like your house, car, and bank account will be at risk.
This business entity is best for someone who is just starting out and plans on working out of their home. But, we encourage you to take the extra step and protect yourself by forming an LLC or a corporation. These business entities protect your assets and will help manage your finances come tax season.
What Is An LLC?
So, what is an LLC? Most people have heard the term before or are vaguely aware of what it means. But, when you’re starting out with your small business, you can’t afford to be vague. Ensuring that you’re legally protected and designated in the proper way will save you time and money. LLCs offer what Sole Proprietorships cannot, protection of personal assets and separation between the business owner and the business itself.
What Does LLC Stand For?
An LLC is a Limited Liability Company. As the name suggests, they help protect the business owner’s personal assets from lawsuits or financial problems. There are a couple of different types of LLCs (more on that later), but for now, just know that this is the step we recommend if you’re looking to legalize your small business. It’s not as complicated as forming a Corporation and it offers you protections that a sole proprietorship doesn’t.
Single Member LLC vs. Multi Member LLC
As you might have guessed from their names, the biggest difference between a single-member LLC and a multi-member LLC is the number of business owners. But, that isn’t the only difference between these two LLC formations, and you don’t need more than one business owner to file for a multi-member LLC (many people opt to make a spouse or family member their LLC partner). We’re not attorneys or CPAs, we’ve just been in the business for years. So, we can’t decide which one is better for you, but watch the video above to get a better idea of which one will be best for you and your small business.
What is a Corporation
A corporation is a business entity owned by one or more stockholders and managed by a board. The most important thing to note when forming a corporation is that the stockholders, directors, and employees of the company are protected from potential liabilities, even ones that arise due to their own negligence.
And, come tax season, a corporation files as a completely separate entity from its owners, and is therefore likely to have more tax breaks available. As with LLCs, the different requirements for forming a corporation will vary state by state, but essentially every state requires you to write corporate bylaws and file articles of incorporation.
Corporations are also typically required to register with the federal Securities and Exchange Commission, in order to issue shares of stock to shareholders, but smaller corporations with only a handful of shareholders can apply for an exemption from having to file. For this reason, forming a corporation is usually best for a business with multiple owners, all having invested significant capital into the business. This is the most complicated and expensive
LLC vs. S Corp
Forming an LLC or a corporation marks a graduation into the next step of your business. It’s the first big step you take to legalize your venture and protect your assets. But knowing which will be the best path for your business to grow into is difficult, especially if this is your first foray into forming a business entity.
An S Corp is a specific tax election, noted with the IRS. Corporations and LLCs can both be taxed as an S Corp. The IRS supports both C Corps and S Corps. To be an S Corp, you have to meet certain qualifications such as, have less than 100 investors, etc. We provide the option for our LLC customers to file as an S Corp with the IRS after their state LLC filing.
How to Start An LLC or Corp
This is where we come in. We’ve talked about the lengthy and complicated filing processes of forming a business entity. Whether you’re establishing a corporation or forming an LLC, you’re bound to run into unanticipated roadblocks and red tape along the way. Our goal is to make forming a business entity easy and accessible, and we do. Our business formation services are completely online and offer a faster, less expensive way to get your small business up and running.