How to Choose Between a Sole Proprietorship and an LLC

It can sometimes be tricky deciding on what business structure to go for your business and how it can benefit you. It can also be daunting to understand what the differences are between business structures, especially what a sole proprietor and LLC is. That is why we have gone into detail in this article in order to give new business owners a clearer mind, in order to make the right decision.

Sole Proprietor vs LLC

A very common comparison is sole proprietor vs LLC, as there is so much information to compare against each other. To start with, a sole proprietor is an individual who is personally tied to an informal unincorporated business and an LLC is a type of business structure that doesn’t legally tie the business owners to the business, but actually protects them. This means that sole proprietors are at a higher risk of losing their personal assets, since it is the same as their professional assets, whereas LLC companies are able to protect their assets, by separating them.

What’s the benefit of being a sole proprietor?

The main benefit of sole proprietorship vs LLC is that you have very little spending costs for running a business. A sole proprietor business has to have a small client base in order to be able to reduce any risks or losses for the business. This then means that you are only required to pay the financial costs to run a business online or physically, which is very minimal. Another benefit is that you can use a fictitious name to operate under, by registering a DBA (Doing Business As). This also means that you can open up a business bank account under the fictitious name.

What is the disadvantage of being a sole proprietor?

There are many disadvantages as a sole proprietor is that you are personally liable for any damages or losses that your business receives and you are most likely to pay a higher tax rate, since you won’t benefit from any incentives. If you are looking for your business to grow, this won’t happen as a sole proprietor, since it is created as a business structure for a limited clientele base.

LLC vs Sole Proprietor

The main advantage of  LLC vs sole proprietorship is that it can bring credibility to your company and it is not needed to use your personal name for your business, whereas for a sole proprietor it is if they don’t register a DBA. You also have beneficial incentives for taxes and you are able to obtain an EIN number (Employment Identification Number) in order to higher employees and expand your business in many ways.

What are the advantages and disadvantages?

Another reason why an LLC vs sole proprietor is advantageous is that you can protect the reputation of your company and have a hired registered agent who can handle any lawsuits discreetly and helps out with all the legal paperwork and annual tax reporting. LLC business owners have a separate bank account, meaning that their personal and professional assets are both separated and protected.

However, a disadvantage for LLC business owners are the high costs and fees that are needed to run a business smoothly and have a healthy cash flow without any damages. This can be challenging for businesses.

Our say

It is very important for the business owner to have a clear understanding and goal as to what they want to achieve from their business. If they are looking to set up a small business that is specialised in a certain skill or hobby such as photography or pottery, they would be suited to a sole proprietorship business structure. However, if the business owner is looking to grow and expand to a huge clientele with a certain product or service, then it is suitable to choose an LLC business structure.