One of the most critical aspects of your initial business plans is deciding the legal status of your new venture as your decision can have an impact on your future success and affect access to funding as well as making a difference to your tax liabilities.
One thing to look at when registering a business in the United States is the various pros and cons attached to forming a sole proprietorship vs LLC so that you can make an informed decision as to which option you choose.
Understanding the difference
It is considered imperative that you choose the business structure with care when you first start out and two of the most popular options are limited liability company’s (LLCs) and a sole proprietorship.
Both offer a degree of flexibility and make the legal structure as simple as possible, but there are fundamental differences between the two that you need to understand so that you can pick the option that is right for you.
An LLC is a legal entity that is aimed at creating a distinction between the owners of the company and the business itself.
An LLC will assume responsibility for its debts and ongoing liabilities, which is different from a sole proprietorship which is structured in a way that means you are personally responsible for all of the liabilities associated with the business.
The question of taxation
One of the fundamental points of consideration when setting up a new business is how to handle the impact of taxation in the best way possible and that is why it always pays to get professional guidance on the correct legal structure that aligns with your plans.
A key point about running an LLC is that all the profits generated by the business are only taxed once, as a default position.
This system is commonly referred to as pass-through taxation and although this is also the system applicable to running a proprietorship there is one notable distinction.
As a sole proprietor, your total income is not subject to tax, just the profits that you generate.
Drawing up the paperwork
If you are looking for the quickest and easiest way of creating a legal structure you will quickly discover that it is very simple to set up a proprietorship.
On the other hand, if you are forming an LLC you will need to file articles of organization and create an operating agreement that lays out the owners and member’s rights and duties within the business.
You will incur a filing fee for submitting this paperwork and ongoing fees for filing annual reports regarding the business’s activities and financial performance.
In summary, an LLC allows you to keep your business activities and liabilities separate from your personal liabilities whereas you are viewed as one of the same when you run a sole proprietorship.
If you have plans to grow the business and go into business with a number of partners it would make sense to use the legal structure offered by the LLC status, so it is a case of deciding what sort of business path you are intending to follow.