Sole Proprietorship Vs. LLC

BusinessZeal Staff Nov 3, 2018
The business structure chosen has a significant bearing on a number of factors that influence the day-to-day working of an enterprise. Here is a comparative study of a sole proprietorship and a limited liability company.
A business follows a particular path where effective, and efficient wheeling is concerned. Explicating the layers of business -- the way the entity is taxed, the degree of administrative requirements, the ease of operation, the extent of personal liability, and a horde of other factors have a distinctive say on the working of a company.
These in turn depend on the business structure. Hence the discussion on sole proprietorship vs. Limited Liability Company (LLC) assumes a great deal of significance.

Definitions

Sole Proprietorship

The concept of a sole proprietorship is simple to understand. The only entity involved is the individual owner of the organization or the company. Most proprietors are particular about maintaining separate accounts with regard to their business as well personal assets and liabilities; however, there is no distinct segregation as such between the two records.
All personal assets of the proprietor are a liability of the business. LIkewise, assets concerning business prove to be a personal liability to the proprietor. Sole proprietorship or DBA (doing business as) is one of the means of not revealing the true legal identity of the company thereby assuming and also working under the flagship of a pseudo title.

Limited Liability Company (LLC)

Limited Liability Company is an arrangement where the owner has a limited entitlement for the debts and obligations. Their position with regard to the entities is parallel to the authority that the shareholders command in an organization. These organization structures are taking on the business circuit.
An LLC is a faithful combination that has limited personal liability and simple associations of a partnership. The owners of a Limited Liability Company may not bear the complete onus of the debts and liabilities. However, ad hoc situations demand that the owners share the responsibility of the liabilities in question.
A Limited Liability Company enjoys a far moldable taxation model. If the business does not remain in the position to make payments to its creditors, the personal assets of the owner or the members of the company shall not be ceased by the creditor in question.
Their investments in business may be hampered if unhealthy financial circumstances prevail. Nevertheless, personal assets -- home, vehicle, and other significant property -- are not obligated to settle business scores.

Basic Differences

☛ A sole proprietor owns an unincorporated business that is not registered with the state unlike a corporation. There is very little government regulation since it is not a separate legal entity. The proprietor is entirely responsible for the debts and the assets of the company and reports business income as personal income.
Although unlimited liability is a distinct disadvantage a sole proprietorship is not taxed at the entity level for the simple reason that it is not considered a separate legal entity!
☛ A limited liability company can be formed by one or more members. The members may be individuals, corporations, other LLCs, or foreign entities. The interest or the share of the members in the company is expressed in percentage.

Comparative Analysis

As far as similarities are concerned both business structures are not convenient from the perspective of raising additional capital. A proprietor has a great deal of managerial flexibility. However, in case of the members of the LLC, the flexibility with regard to management is contingent on the operating agreement.
In order to make a comparative study between the two, we need to examine both the similarities and the differences between the two business structures.

Taxation

The absence of double taxation makes a sole proprietorship a highly desirable business structure. The income flows directly to the sole proprietor and the recipient is required to pay self-employment tax.
Since the Internal Revenue Service (IRS) does not recognize LLC for the purpose of taxation, the LLC may choose to be taxed as a sole proprietorship or a partnership. In this case the members are expected to file tax returns individually, while the LLC files tax returns with the IRS only for the sake of providing information.
It would behoove the readers to note that although a limited liability company provides the management with the flexibility and the benefit of pass-through taxation, LLC may choose to be taxed as a corporation. This is possible since the IRS does not recognize it as a classification for tax purposes.

Liability

A sole proprietor has unlimited liability and may be required to use personal property for the sake of assuaging the debts of the business or for tackling lawsuit settlements. In case of a limited liability company there is a clear demarcation between the business entity and the members. Thus, the members are not liable for business debts.
However, by providing personal guarantees or by signing contracts in their name members become liable for business debts. In case the book-keeping is not up to the mark the members may be held responsible for the debts of the LLC.

Formation

The average cost of formation of a limited liability company is around $800 which is the same as the cost required to form an S-Corp. A sole proprietor is not required to file with the state. In other words the formation cost of a sole proprietorship is nil since there is no state-specific filing fee.

Continuity

A sole proprietorship is terminated when the proprietor decides to quit doing business. If the operating agreement allows for the transfer of interest the members can transfer their shares thus ensuring the continuity of the limited liability company.
The given discussion would have clearly outlined the differences in the business structure between a sole proprietorship and LLC. Considering the cost of formation and the ease of operation, a sole proprietorship may be a suitable business structure provided the entrepreneur is willing to contend with the repercussions of unlimited liability.