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Key differences between a sole proprietorship and an LLC

On Behalf of | Nov 2, 2023 | Business Law |

When starting a business, you must decide whether to establish a sole proprietorship or form a limited liability company. Both structures have distinct advantages and differences that can significantly impact the day-to-day operations and the owner’s potential liabilities and responsibilities.

Sole proprietorships are considered the most straightforward and least costly business structure. If you’re the sole owner and start doing business, you’re automatically considered a sole proprietorship under the law. 

Understanding the liability aspect

In a sole proprietorship, there’s no legal distinction between the owner and the business. This means that business debts are also personal, so the owner’s assets are at risk if the business is sued.

An LLC acts as a separate legal entity, so the owner or owners typically aren’t personally responsible for the business’s liabilities and debts. This protection is why many business owners opt for the LLC structure.

Tax considerations and flexibility

In a sole proprietorship, profits and losses pass through to the owner’s personal tax returns. An LLC offers tax flexibility. It can be taxed through each owner. It can also be taxed as a corporation, potentially providing tax benefits under certain circumstances. This is beneficial when there are multiple owners of the LLC.

Governance and formalities

A sole proprietorship doesn’t require formal agreements since only one business owner exists. This simplifies decision-making processes and operations. An LLC typically has an operating agreement that outlines the management structure and the owners’ rights and responsibilities. This formal agreement is crucial in guiding the business’s operations and resolving any disputes between members.

When deciding which structure is right for your business, consulting someone familiar with these matters is beneficial. This enables you to make the best choice for you and your company.