Why You Should Form an LLC vs. Sole Proprietorship

Why You Should Form an LLC vs. Sole Proprietorship

Some business owners might think operating as an LLC is basically the same as being a sole proprietorship. In reality, though, incorporating your business as an LLC is the next step forward for an emerging entrepreneur, and the distinction will set you apart from your competition.

The primary difference between these two structures is that you receive some liability protection by incorporating as an LLC. This is important for businesses owners who have personal assets — especially if they use those assets to conduct some of their business. In the end, however, both of these structures allow owners to report their business income on the proprietor’s personal tax returns. Let’s take a look at some other advantages to forming an LLC vs. a Sole Proprietorship.

Make Fundraising Simple

Most businesses need some operating cash to run smoothly and perhaps a line of credit to buy supplies. As a Sole Proprietor, you would need to use your personal finances or take out loans, which could negatively impact your credit score.

However, as an LLC, you can borrow under the company name and receive some legal and financial protection. Additionally, having an LLC means you can pursue other avenues for funding later on at lower personal risk.

Protect Your Personal Assets

If you choose not to incorporate, your personal property could be at risk for various reasons. For example, if you default on your loans or are found liable for damages in excess of your company’s assets, you may be forced to liquidate your personal assets.

Owning an LLC can be the difference between retaining and losing personal property when creditors seek restitution if you find yourself in financial trouble. In this case, your liability would only extend as far as the business assets, as long as you maintain appropriate separation between your business and personal finances. Additionally, creditors would not be able seize your LLC’s property if you had personal financial troubles.

Utilize Pass-Through Taxation

One of the best benefits of incorporation as an LLC is the simple pass-through option for filing your taxes as a business owner. The LLC structure allows business owners to choose whether to be taxed as an S Corp or C Corp, but many opt for pass-through taxation.

“Pass-through” means that all business income is reported alongside your personal taxes. This allows owners to avoid being taxed for both business income and personal payments from the business. A Sole Proprietorship would also allow for pass-through taxation, but the LLC still offers extra financial protection (as seen above).

Bring on Multiple Owners

As your business grows, you may find that you want to take on additional partners. Bringing in business partners always comes with some degree of risk. As an LLC, you’ll be able to retain the protections listed above while adding new members to the organization. Clear and pre-determined terms help minimize the risk inherent in sharing control of your business.

As a multiple-member LLC, you get to decide together what each participant’s role and responsibility will include. If you remained a Sole Proprietorship, you’d have to form a partnership if you wanted to bring on additional owners. This process can be much more complicated and cumbersome compared to adding members to an LLC.

If you’ve decided that forming an LLC is the best option for your new business, you can incorporate today with Incfile. Our online business formation packages start at $49 + state fees, and they include digital access to all your incorporation documents plus a year of free registered agent service. You’ll be supported by an experienced team that over 150,000 other business owners trust.

Becca Christman

Rebecca has been freelancing as a work-at-home professional for over six years. She has written more than 1,000 blogs.