So you have decided to start a new business. One of the most important decisions that you will make is the form that this structure will take. Should you take no action and let it be a sole proprietorship or should you create an LLC? In some ways, both structures are very similar and in other ways, they are vastly different. By doing a comparison of LLC vs Sole Proprietorship, we hope to give you the information you need to make an informed decision.
Ease of startup
When it comes to ease of startup there really is no comparison, a sole proprietorship has very few requirements. If you are using your own name, you basically just need to start in order to do business. If you want to use a different name then you need to file a DBA (doing business as) form with the state that you are doing business in.
To form an LLC in the state of Texas you need to file a certificate of formation with the Secretary of State. The form may be filed online or you can get the required form from the office of the Secretary of State. This form may have a different name in other states. The requirements in some states may also be different. It is up to you with the help of your financial advisor to know the laws of your particular state and adhere to them.
Getting an EIN (employer identification number) is also something that you will want to do if you are forming an LLC, with a sole proprietorship you can use your Social Security number. In either type of entity, if you are in a state that has sales tax you need to register and if you are going to be reselling items, you should apply for a tax-exempt certificate.
Cost of Startup
With both a sole proprietorship and an LLC you will be responsible for getting any permits or licenses that are required by the state or local authorities in your particular location. An LLC may face other requirements including registering with the state, there may be filing and/or registration fees associated with this. Yearly fees may also be required to remain in compliance.
With a sole proprietorship, you and your business are one, you don’t file a separate tax return for your business. With an LLC, you can be taxed in a variety of ways depending on how your LLC is structured. You will pay taxes as either a corporation, a partnership or a sole proprietorship. Getting advice about which one is the most beneficial to your particular business is vital.
This is the area where there is the most difference between a sole proprietorship and an LLC. With a sole proprietorship, you and your business are a single entity, therefore any assets that you have personally are not protected from action against your business. The same goes for any debts incurred. With an LLC the name says it all, Limited Liability Company. As long as you follow the rules for an LLC and keep your personal and business finances separate, you are not personally liable in a suit against your business, for business debt and other business-related expenses.
Hopefully, we have answered some of the questions that you may have about how to structure your business. We are sure you have more questions and we are here for you to answer your questions and share our expertise. Give us a call at Chandler and Knowles CPAs, PLLC, and let us help you make the best choice for your particular business.