Sole proprietorship and LLC are two business structures that are commonly chosen by budding entrepreneurs. Deciding on one depends on your business preferences. And if ever you’re still confused on what business model to subscribe to, we’re here to help as we compare their major differences, advantages, and disadvantages. This article will also include information on our top two recommended business formation services: Incfile and Northwest Registered Agent. Read on to find out which business structure is best for you and which registered agent will best cater to your needs.
Sole Proprietorship vs LLC Comparison Chart
Sole Proprietorship vs LLC Overview
Their names already state the obvious but there are still other areas where sole proprietorship and LLCs differ.
Between the two, sole proprietorship is the easiest to start as it does not need to be formally registered. The business owner has complete control over the business. In the same way, the business owner is also responsible in filing and paying taxes. Furthermore, the business owner and the business is legally considered as one entity. Thus, the business owner does not have personal liability protection should financial problems arise later on.
Meanwhile, when a business is registered as a Limited Liability Company or LLC, owners are protected from personal liability in case of bankruptcy or legal troubles as it is considered a separate legal entity. Forming an LLC also requires extra work as the business should be registered with the state. And while sole proprietorship businesses only have one owner, LLCs can have one or more owners, including corporations or business entities. LLC owners are addressed as members and they have more freedom than board members in a corporation. Furthermore, LLC members file personal tax returns where they declare their incomes and losses.
Sole Proprietorship vs LLC Advantages & Disadvantages
The main advantage of forming a sole proprietorship vs LLC is the freedom to start the business right away with limited capital.
Sole proprietorship and LLCs both have key advantages and disadvantages that can affect the way you manage your business. Take time to read its pros and cons and see which one will suit your business better.
- Easy to form with less paperwork and minimal costs
- No limit on number of employees
- Provides legal liability protection to its members
- Members’ personal details are kept private as the registered agent receives all correspondences
- Can customize tax structure according to their circumstances
- Operating under a business name makes LLCs more credible to banks and consumers
- No personal liability protection so creditors can claim the sole proprietor’s personal assets in case of bankruptcy
- Owner is also personally liable should something happen to their employees
- Without an office address, the owner’s home address will be listed in the state business registration database
- Taxes are based on profits so it will be more expensive as the business grows
- Less credibility and branding for sole proprietors registered with their own names
- Must be registered with the state and represented by a registered agent service
- Must pay state filing fees
Sole Proprietorship or LLC? Which Should You Choose?
Sole proprietorship is good for small entrepreneurs but LLCs are better for businesses that may expand in the future.
Sole proprietorship is very attractive to starting entrepreneurs as it does not require huge start-up capital and complex legal documents. Business that will benefit more from a sole proprietorship are those that have a small clientele such as their relatives or neighborhood friends. Examples of these businesses are those based on hobbies like photography or videography, home baking, or crafts. These are often low-profit and low-risk businesses so there are low chances of financial liabilities.
On the other hand, LLCs are best for businesses with a bigger customer base. As profits increase, the risks of liabilities also increase so owners/members will need personal liability protection. Moreover, having a registered agent service makes it easier to expand the business to other states. Registered agents also offer add-on legal and administrative services so business owners can have more liberty to focus on product development or marketing.
Setting Up Your LLC
Forming an LLC is made even easier with the help of a registered agent.
Below are the steps in forming an LLC:
- Picking an available business name
- Providing a business address
- Assigning a registered agent
- Listing the names and address of its members
- Declaring the purpose of your LLC
- Filing of the articles of organization
States require LLCs to have a registered agent. You may be overwhelmed with the number of business formation companies that have sprouted over the years but you can check our list of the best registered agent services to help you decide on which one to contact. Choose a registered agent that will not only act as your legal representative but can also help form your LLC. By subscribing to their LLC formation service, all you will need to do is answer a few questions, choose a plan, pay for the service, and wait for your LLC to be approved.
Our Recommended LLC Formation Services
Incfile and Northwest Registered Agent are registered agent services that also offer LLC formation.
Incfile and Northwest Registered Agent are are top recommendations when it comes to LLC formation. Both have a proven track record in the industry and have the most affordable packages. But while both are good in terms of LLC formation, your choice will depend on your business goals.
Incfile is known for its affordable packages and its wide array of extra options. If you see your LLC needing these extra services in the future, then Incfile is probably your best bet. Meanwhile, Northwest Registered Agent stands out because of its customer service. If you’re the type of owner who gives value to expertise and knowledge in the legal process and formation of your business, Northwest Registered Agent may be perfect for you.
Should you need more information about other LLC formation service companies, you may check out our list of the best LLC formation services.
Yes, it is possible if you wish to be the sole owner of your business with limited personal liabilities
Yes, it is possible though the steps may vary per state. It is also very easy especially if you hire the services of a registered agent.
Yes, provided that there should be a US address where the state can forward official correspondence and legal documents related to the business.
Yes, in most states. LLCs can have individuals, corporations, or other LLCs as members.