Did you know that there were over 4.41 million new business applications in the US in 2020 alone?
Several million entrepreneurs step up each year to establish their businesses. But the one major hurdle that everyone faces is that of selecting the right business structure.
There are several business structure options out there so selecting from them can get tricky. The difficulty is even more pronounced for LLCs (Limited Liability Companies) and Sole Proprietorships as they’re both extremely popular corporate structures.
So, which one should you choose?
To help you decide on the right structure, we’ve written this guide.
So let’s dive in.
Forming Your Company
When it comes to Sole Proprietorships, you can establish the company and run it under your name. Alternatively, you can file for a “Doing Business As” or DBA and run it using a fictitious name.
But the LLC formation process is more complicated.
You have to file Articles of Organization for your LLC with the Secretary of State and have to pay the state filing fees. In addition to that, you’ve got to draft an LLC Operating Agreement that outlines the roles and responsibilities of all the members.
The way you’re taxed is also based on your company structure. In Sole Proprietorships, all of the losses and profits of the company pass through to the individuals. The same is the case with LLCs too. However, LLC members can choose to get the LLC taxed as an S-Corporation as well.
One major factor that separates LLCs from Sole Proprietorships is their ownership structure. While LLCs allow you to have one or more owners, Sole Proprietorships, as the name suggests, have a single owner.
The owner of a Sole Proprietorship firm has to be an individual. On the other hand, the owners of LLCs (called members) can be individuals, foreign firms, or even other LLCs.
That said, regardless of the corporate structure you decide to use, it’s important to make sure that you do all of the paperwork correctly To find out more about how LLCs and Sole Proprietorships differ from each other, you can refer to this infographic designed by GovDocFiling.