In 2020 alone, over 4.41 million new business applications were made in the United States. Many aspiring entrepreneurs try their hands at starting and running their own businesses in the country.
However, the process of starting and running a business can be quite challenging. You have to come up with a business idea and then implement it well. Additionally, you’ve got to find funding for the business, hire new employees, find an office, among other things.
Among all of this, you also have to select a business structure as it’ll dictate the ways your business will be run, taxed, and so much more.
Two of the most popular business structures are LLCs and sole proprietorships. But it can be quite challenging to choose between them. To help you decide which one is better for you, we’ve put together this guide.
The business structure you select also affects the ownership structure of your business. Sole proprietorships are only meant for those entrepreneurs who want to start a business solo. If you’ve got a partner, then you’d have to go for an LLC, which allows you to have multiple owners.
These owners, called members, can also be entities other than individuals such as foreign companies and other LLCs. In the case of sole proprietorships, the owner has to be an individual.
One of the other things that the business structure dictates is the way a company is formed. The process for forming a corporation, for instance, is perhaps the longest. On the other hand, sole proprietorships are the easiest to form.
You can start running them in your name with ease. However, if you’d like to get a different name for your business, you can always apply for a fictitious name by filing for a DBA (Doing Business As).
But what about LLCs?
The process for forming an LLC is slightly different and more complex. You first have to file Articles of Organization for the LLC with the Secretary of State. This is then followed by developing an Operating Agreement for your LLC. Finally, you’re required to pay the state filing fees.
As mentioned above, your business structure determines how the business will be taxed. Every corporate structure comes with a different tax regime.
Luckily, both LLCs and sole proprietorships offer pass-through taxation. This means that the business income will directly pass to the owner and you have to show it on your personal tax return.
However, if you’re in a multi-member LLC, you have to pay a self-employment tax. To avoid this, you can choose to get taxed as an S-Corporation. This means that you’d be treated as an employee of the company. However, you would be required to pay corporate taxes for the business.
To learn more about how LLCs and sole proprietorships are different from each other, you can take a look at this infographic developed by GovDocFiling.