When you’re establishing a business, you’re faced with numerous choices and decisions to make. These include the likes of selecting an office space, developing a business plan, finding employees, getting funding, and more. Let’s be honest — the list can be extremely long.
In such a hectic schedule, you’ll also have to establish your business legally. This will require you to choose a corporate business structure for it too. Now here’s where things start becoming tricky.
You’ll be faced with numerous choices and it can be difficult to zero in on one. This is especially true when it comes to Sole Proprietorships and LLCs.
Both of them are extremely popular among businesses. So, to help you make a better informed decision, we’ve put together this guide.
Company Formation Process
Your company structure also determines how you’ll have to go about the company formation process. The process for Sole Proprietorships is relatively simple. You can start operating your business under your name with ease. If you want to get a different business name, though, you can always apply for a DBA (doing business as) and get it done.
That’s, however, not the case with LLCs. These business structures require you to file your Articles of Organization with the Secretary of State. Then you have to create an Operating Agreement and pay the state filing fees.
The way your business, and you, get taxed is also based on the business structure. In Sole Proprietorships, the income and losses pass through to you and these can be reported on your personal tax returns. The same applies to LLCs too.
However, you’ll have to pay self-employment taxes in both cases. If you want to avoid that, you can decide to have your LLC taxed as an S-Corp. This would mean that you’d become an employee of the company and won’t have to pay the self-employment tax.
The business structure also dictates the number of owners that you can have. Sole Proprietorships can only be owned by an individual and can’t have more than one owner.
But that’s not the case with LLCs.
They offer a more flexible structure. In this case, the owners could be:
- Foreign firms
Do you want to learn more about LLCs and Sole Proprietorships? You can refer to this infographic developed by GovDocFiling.
About the author
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.