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Why might an LLC be a better option than a sole proprietorship?

On Behalf of | Mar 1, 2024 | Business Law |

Choosing the right business structure is a crucial decision for entrepreneurs, impacting everything from tax liability to personal liability and the ability to raise capital. Many business owners find that a limited liability company (LLC) offers advantages over a sole proprietorship, making it a more attractive option.

Operating as an LLC can enhance a business’s credibility and professional image with customers, suppliers and lenders. The LLC designation shows a formal commitment to the business. But that’s only the start of the advantages, so anyone considering opening a business should understand all the benefits of an LLC before embracing or dismissing this opportunity as an option.

Limited personal liability

One of the most significant advantages of an LLC is the limited personal liability it offers to its owners, who are called members. Company debts and liabilities typically aren’t assumed by the members in an LLC. This contrasts sharply with a sole proprietorship, where the owner’s personal assets, such as a house or car, can be at risk if the business incurs debt or is sued.

Ability to raise capital

An LLC has more options for raising capital than a sole proprietorship. While sole proprietors are limited to personal funds and loans, LLCs can bring in new members by selling membership interests, potentially providing a significant capital influx. Additionally, having an LLC might make it easier to obtain bank loans and investments from venture capitalists, who often prefer to work with formal business entities.

Perpetual existence

LLCs can have a perpetual existence, meaning the business can continue operating beyond the original members’ involvement or life. The company ceases to exist in a sole proprietorship upon the owner’s death or decision to stop doing business. The ability of an LLC to endure changes in ownership can be critical for long-term business planning and sustainability.

Anyone who opens a business must ensure that they have all their legal bases covered as they move forward with the formation process. Legal assistance is beneficial in these cases so the owner can better ensure that their and the business’s interests are protected.