Sole Proprietorship Versus Limited Liabilty Corporation: Which Is Best For Your Business?
If you are starting your own independently-run business for the first time, one of the decisions you will have to make is whether to run your business as a sole proprietorship or a limited liability corporation, also known as an LLC. There are benefits and drawbacks to both options. Learning about the benefits and speaking with a corporate lawyer will help you determine which is best for you. Here are some of the benefits of a sole proprietorship and a limited liability corporation.
Benefits of a Sole Proprietorship
- Easiest and Cheapest Way to Form a Business
The biggest benefit to setting your business up as a sole proprietorship is that it is the easiest, fastest and cheapest way to form a business. If you DJ weddings, are a freelance writer or photographer, or own a daycare, you may be looking at setting yourself up as an individually-run business. This can make it possible for you to get a business bank account and credit cards. However, setting yourself up as an LLC business can sometimes be costly and time-consuming. You don't have to register yourself as an LLC or draft and file articles of organization. This makes this process fast and inexpensive.
- No Specific Accounting Requirements
The other advantage to setting your business up as a sole proprietorship is that there are no specific accounting requirements. You simply need to keep track of your income for tax purposes. However, you don't have to try to keep personal and business expenses separate. When you have a limited liability corporation, you have to keep track of your money and ensure it never mingles with your personal money. When you are starting a new business, you may wish to float money from your personal account to your business account to cover expenses until a client pays you. You have the freedom to do this with a sole proprietorship, but not an LLC.
Benefits of a Limited Liability Corporation
- You Are Not Responsible For Your Business Debts
One of the biggest advantages to setting your business up as a limited liability corporation is that you are not responsible personally for your business debts. If you take out business loans, and your business fails, the lending company cannot come after you or any of your assets to cover the debt. Likewise, if your business is sued and another party is granted an award against your company, the party can only come after your company assets, not your personal ones. This is very different from a sole proprietorship. If you have a sole proprietorship, you are responsible for your business debts and they can personally come after you. If you have a lot of assets, you may wish to protect yourself by forming an LLC.
- Easier to Transfer Ownership
The other major benefit to an LLC is that it is you can sell off or transfer ownership of the company without disturbing the day-to-day operations of the business. This is because you can sell everything rolled into the LLC together as a package deal. When you sell a sole proprietorship, this isn't the case. You have to transfer each license, permit or asset individually. And the new owner has to apply for and set up their own tax identification numbers and new bank accounts, making it harder to transfer. If you plan on selling your business at some point down the road, setting your business up as a limited liability corporation may be the better option.
There are benefits to setting your business up as a sole proprietorship. There are different benefits to setting your business up as a limited liability corporation. Taking the time to learn about the benefits will help you decide which option makes the most sense for your business. If you still are unsure, a corporate lawyer can help you pinpoint what business type is ideal for you and help you fill out and file the documents needed to establish your business.