Do you operate a small business that requires the right legal structure? One of the most popular flexibility options, between LLC and sole proprietorships, is management flexibility. But which one fits best into your business? This article will compare both, helping you make an informed decision to determine which one is better suited for your business.
An LLC, or a Limited Liability Company, provides more management flexibility than does a sole proprietorship. There can be multiple members actively participating in the management of the company of an LLC. It makes it possible to share the decisions and contribute different perspectives, while sharing approaches to the decision process.
Indeed, one of the key advantages of having an LLC is to give leeway when there is a need for distribution of profits. Unlike a sole proprietorship in which all the owner’s gains are amassed, the LLC will allocate it according to percentages held by the members. This could prove handy in a scenario where you may have partners or investors wanting a share of the profits close to being equitable.
One of the benefits of an LLC is the separation of business and owner. That means all the owners’ personal properties cannot be taken in case of the liabilities of the business. This can be reasoned by the fact that, for some lawsuit or debt, personal properties of a member are not generally subjected to fulfill the obligations of a business.
A one-man sole proprietorship is owned and operated by one person. This kind of structure is simple but, unlike an LLC, is not flexible about distributing responsibilities.
The other benefit of having a sole proprietorship is the simplicity, that is easy to start up and maintain. A sole proprietorship can be initiated by someone with very little formalities, as opposed to an LLC which involves filing formal documents and subsequent paperwork. Its simplicity makes it highly appealing for small businesses requiring speedy erection and get on with business.
One other easy feature of a sole proprietorship is that of decision-making. Since you own the business yourself, you have total power over anything within your company. This is helpful if you like having total freedom and don’t need to discuss with other members before making significant decisions.
Flexibility in management LLCs are very much superior to sole proprietorships. In a series LLC, you may have multiple members who can actively participate and be engaged in the management of the business. This shared decision making would bring diverse perspectives and also diversify expertise, thus eventually delivering more to the business.
This, however, can only be owned by one owner and is subject to decisions made by just one person. Although this is one of the simplest forms of business entities, it can in some ways be unappealing if you prefer having a team of individuals who may contribute to management and also decision-making.
This also allows an LLC to determine specific roles and responsibility of the members. Such would help streamline operations and simplify the checklist of each member based on areas of expertise. A sole proprietorship entails a lot of tasks in one person’s hands, and this can be overwhelming and limit growth potential.
Related reading: Starting a Business from Home: 4 Tips for Success
Apart from the flexibility of management, many factors must be considered when selecting an LLC and a sole proprietorship. Such factors may include tax implications, liability protection, and ease of formation.
The tax implication differs between the two structures. All the business income and expenses are reported on the owner’s personal tax return in a sole proprietorship. It also means that the owner is personally liable for paying any taxes that the business might incur. Members in an LLC have the right to be taxed as a partnership, corporation, or even as a sole proprietorship. Each of the options has its own particular tax advantages and disadvantages. It would be really advisable to consult with a tax professional about which would benefit your business best.
Another relevant factor that should be taken into consideration in this context is liability protection. As mentioned earlier, an LLC thoroughly distinguishes a business from its owners. This makes it so that liabilities that may arise out of the business do not infringe on personal assets belonging to the owner, at least in theory. A sole proprietorship does not distinguish the owner of the business and, therefore, the owner is personally liable for all debts of the business and the obligations. This exposes their assets to the risk of being seized in the event of a lawsuit or debt.
Ease of formation should also be considered. A formal LLC entails a procedure that involves a good number of paper work, whereas a sole proprietor can be established with less formality. So a sole proprietorship would be best if all that is required is a quick and easy setup. But if the extra protections and versatility are what you have in mind for an LLC, then perhaps the extra paper work will not be such a burden at all.
So, in case you have come to a conclusion that an LLC best suits your business, these are the general steps you’d take in order to form one:
If you have decided that a sole proprietorship is appropriate for your business, here are the basic steps to set one up:
Record your income and spendings for tax reporting.
LLCs and sole proprietorships have legal and tax implications which must be given consideration while making a decision.
From a legal perspective, an LLC is also more protective of the personal assets. Referring to what’s said above, the owners of an LLC generally aren’t personally liable for the debts and obligations of the business, and creditors cannot come after the owners’ personal assets to try and settle business debts. The owner of a sole proprietorship is personally liable for all business debts.
It can make a huge difference whether it’s an LLC or a sole proprietorship for tax purposes. As a sole proprietor, all business income and expenses on your personal return are included and thus the taxes liable on you personally for those pertaining to the business. Members of an LLC can be taxed as a partnership, corporation, or even as a sole proprietorship. All have their pros and cons on taxes, so seek the advice of a tax professional for your specific case. Finally, read opinions on Reddit if you’d like to read up more about this comparison of businesses.
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