Choosing the right business structure for your company is important. The type of business structure you choose plays a role in how you file taxes, how you pay yourself or draw money from the business, what type of liability you may have, and many other considerations.
For small business owners, deciding between an LLC and a sole proprietorship can be difficult. They both offer pros and cons, and each is definitely more right (or more wrong) for certain types of businesses than others.
If you’re not sure where to start when launching your own business, a business law attorney can help. Check out the information about sole proprietorships and LLCs below, and then get in touch with Katie Charleston Law, P.C., for help creating and protecting your business.
The Benefits of a Sole Proprietorship
Sole proprietorships tend to be the easiest of all business structures to set up. You don’t have to file any state paperwork or articles of incorporation. The only real exception is if you need a specific type of professional license or business license for the work you plan to do. In that case, you would need to file any paperwork necessary to obtain the required licenses.
With a sole proprietorship, you usually earn money from the business as a self-employed individual. The income you earn from the business is reported on your personal tax returns, typically via what’s called a Schedule C. This can give you some flexibility in how you manage your business and personal finances—though you may want to consult with an accounting professional to help you keep things separate and avoid any self-employment tax woes.
The Benefits of an LLC
An LLC, or limited liability company, is a more formal business structure than a sole proprietorship. Because of that, it may offer you better credibility in the market. That means potential customers or clients may see you as more credible or reliable. It also means business partners and lenders may be more willing to work with you.
Perhaps the biggest benefit of an LLC is the boundary it creates between you and the company. The company becomes its own entity, which means separate finances and branding. That makes it possible for you to seek credit in the company’s name rather than your own, helping you keep personal and business finances separate. It also creates some liability protection for you so you’re not automatically on the hook for business debts or lawsuits.
Some Downsides of a Sole Proprietorship
A sole proprietorship doesn’t offer the same level of liability protection that an LLC does. With a sole proprietorship, you and the business are linked much more closely. That means you’re much more likely to be considered liable for debts or lawsuits relevant to your business.
This link between you and the business may also limit the opportunities your company has for growth. You may be unable to get investors or raise capital with lending opportunities, partly because any lending might be based on your personal credit and financial situation rather than the potential of the business.
Without a business name, you also have less power in the market. You can sidestep this issue by filing DBA (doing business as) paperwork and establishing a separate business name. However, that separate name still doesn’t protect you from liability.
Some Downsides of an LLC
LLCs are more time-consuming and expensive to form than sole proprietorships, so you may not be able to open your business as quickly. You’ll have to file paperwork with the state to create the business structure. Then you may need to file reports and other paperwork annually to ensure your business remains in compliance with state laws for LLCs.
In some cases, tax costs are higher for LLCs than for sole proprietorships. It may also be more difficult or cost more to file annual tax returns for LLCs.
What Structure Might Be Right For Your Business?
The business structure you choose depends on your goals, needs, and business type. A freelance writer, graphic artist, or another service-based contractor may not benefit enough from an LLC to go through the hassle, for example.
However, a small contracting business has enough potential liability that the protection of the LLC is likely more than worth the cost of setting one up.
How a Business Law Attorney Can Help
Getting a lawyer to help set up your business can be beneficial for a number of reasons:
They can help you understand the pros and cons of all applicable business structures so you choose the right one for your needs.
They can ensure all the details are handled, such as maintaining a registered agent with the state.
They can help you create legally binding contracts and agreements when working with others.
They can advise you about your rights and potential risks to help you avoid legal troubles for your company.
For more information about how a business law attorney can help, contact us today.