Sole Proprietorship VS LLC: What is the difference?
Sole Proprietorship Versus LLC
The most common type of business in America is a sole proprietorship. According to the IRS, there were about 25.3 million of these businesses in 2012. That's 87% of all businesses in the U.S. The small business owners that run these companies are known as “solopreneurs.”
A sole proprietorship is essentially a business owned and operated by a single individual (the “sole proprietor”). The person is responsible for all the business decisions, including financial decisions. Most often, the person is an individual (although a partnership or LLC can be a sole proprietorship). A sole proprietor is usually the only person that signs the tax documents for the company. He or she reports all the income and expenses on their own personal tax returns.
There are many advantages to being a sole proprietor. You are not required to register with the state as a business, you can deduct your business expenses on your personal taxes, and you can choose the state and filing status that makes the most sense for your business.
The downside is that a sole proprietorship is a simple, standalone business that is highly vulnerable to losing its owners to a business failure. Because there is only one person responsible for the company, if that person leaves or goes bankrupt, the business will be in serious trouble. An additional disadvantage is that the business has only one set of books: the owner's personal records.
To deal with these issues, the IRS allows for a sole proprietorship to be organized as an LLC or a partnership. When choosing this option, the business owners have the choice of either being taxed as individuals or as a business. The main advantage of creating an LLC or a partnership is that it is a separate legal entity from the owner. This entitles the members to own property and be sued separately from the business. It also provides some limited liability protection for the members. An LLC or a partnership file their own tax returns and are required to make periodic reports to the IRS.
The Limited Liability Company (LLC) is a form of business organization that was designed to provide limited liability to investors while also allowing companies to have more flexibility with regards to how they run their operations. The number of LLCs formed annually is on the rise, with about 759,000 new entities becoming active in the US in 2020 alone. While the formation of an LLC is pretty straightforward, it's always a good idea to consult with an attorney to ensure that you form an LLC that is correctly aligned with current legal requirements.
The Rise In Popularity
The use of LLCs as a form of corporate structure is becoming more popular due to the rise of the digital nomad, the rise of technology, and an increase in general entrepreneurism. Since the Great Recession, more and more people have become interested in pursuing self-employment opportunities and have been attracted to the flexibility and limited liability that an LLC provides. In 2020 alone, there were 1.73 million new businesses registered as either Sole Proprietorships or LLCs. In fact, according to a report from the Small Business Development Center (SBDC), 43% of small businesses in the US are now operated as LLCs. That's more than double the share just a few years ago.
The increase in popularity of the LLC has also been fueled by a rise in online entrepreneurship education. Many universities now offer full-fledged business degrees, and with the increase in available online degrees, more and more students are learning how to be entrepreneurs and how to start their own businesses. With more people learning about entrepreneurship, the demand for business services that provide the benefits of an LLC without the legal responsibility has increased, spurring the growth of legal services for startups and small businesses.
How An LLC Provides Limited Liability
An LLC provides limited liability to its members via three different types of ownership structures. First, the entity itself is generally considered to be a separate legal entity from its members. This means that your personal assets are protected from any debts or liabilities that the business may incur. If you're wondering how this type of protectionism can be beneficial, this type of structure offers a limited form of bankruptcy protection to the businesses that use it, shielding them from any creditors. Second, the business can issue shares to investors, allowing them to participate in the profits of the organization while also bearing some of the risk of business failure. In this way, an LLC provides limited liability to investors who buy into the business. Third, the business can establish a Joint Venture with another legal entity or individual to combine their resources and expertise with those of the business for the purpose of establishing a new business. In this case, both the Joint Venture and the investors that contributed to it are protected from any liabilities that the new business might incur.
Some Common Uses For An LLC
While the Limited Liability Company was initially designed to be a business structure used for startup businesses and high-risk, high-reward ventures, it has since found a home in almost every industry and has become one of the most popular business organization choices among entrepreneurs and business owners. Here are just some of the most common uses for an LLC:
LLCs can be used to provide limited liability to investors in real estate development projects, purchasing real estate for rental or commercial purposes, land banking (saving land for future development), and commercial fishing ventures.
LLCs can be formed for the express purpose of holding a patent or trademark, protecting the brand's image, and defending against copyright or trademark infringements.
Many entrepreneurs use LLCs as a way to avoid paying capital gains taxes on the sale of a business or an asset that they bought for profit. The gains from the sale of investments (such as stock in a company) are generally treated as ordinary income. If you're in the 33% tax bracket, you'll pay a lot less in taxes as an LLC than as a sole proprietor or a corporate entity.
An LLC can be structured as a Sub-Chapter S corporation for the sole purpose of taking advantage of the benefits that that structure provides without having to file articles of incorporation or obtain a federal tax ID.
Organizations that receive over $50,000 a year in gross revenue can file as an S corporation, using their profits to pay for business expenses, and pay no taxes at all on those profits.
An LLC provides a great opportunity for a parent company to control the assets of a subsidiary. In an S Corporation, the shares of the entity are not transferable and do not provide the same type of ownership structure.
An LLC can be registered as a foreign corporation in any state for the purpose of conducting business there without having to file for a license. This is particularly beneficial if you're a small business owner who wants to avoid paying state income taxes.
LLCs are extremely useful in holding and protecting valuable intellectual property, such as patents, trademarks, and copyrights.
Flexibility in business operations is one of the main reasons why many entrepreneurs choose to operate as an LLC. It provides an excellent framework for a business to grow and evolve with minimal legal restrictions. Many entrepreneurs enjoy the fact that they can establish any type of business relationship that they want, with no legal implications. They can create joint ventures with other businesses, trade with other nations, and offer consulting and supporting services to other companies.
Many experts recommend that new entrepreneurs use a 3% discount to calculate the cost of capital for a business. That means that a $100,000 investment in a business will cost the investor $103,000. An entrepreneur that wants to use a bank loan for a business may have to pay several thousand dollars more than that in interest. An investor that funds an LLC owns a piece of the business, but does not control it. This means that the entrepreneur is in full control of the business and can make any decision that he or she desires. This type of investor is commonly referred to as a Partial Owner. The main advantage of an investor that is a Partial Owner is that they give the business owner full control over the operation of the business without having to pay excessive management fees.
In most parts of the country, you can form an LLC with just about any business name that you choose. However, there are a few states, such as New York and California, where you can't use your own name for the organization. If you want to form an LLC in one of these states, you'll have to find a different business name.
If you're considering an LLC as a business structure, be sure to consult with an experienced attorney to make sure that you choose the right legal entity for your needs. Also, be aware of any relevant state laws and regulations that might impact your plans. Finally, keep in mind that you might have to register the entity in order to use it.
What Is A Joint Venture?
A joint venture is a business partnership that is established between two or more organizations, businesses, or individuals for the purpose of carrying out a specific business or commercial venture. Essentially, it is a collaboration between two or more organizations that brings together complementary skills and resources to create something new and unique for the benefit of all involved.
Joint ventures can be very beneficial for businesses, particularly those that need to pool their resources together in order to make something happen. In a joint venture, each organization maintains a degree of autonomy, but still works together to achieve a common goal. The upside of a joint venture is that it provides an excellent way for businesses to work together while still maintaining a degree of independence, without having to give up any control or ownership of the business to a third party. The downside to a joint venture is that it can be very difficult to determine the ownership of the business. It often leads to complicated tax situations and a loss of valuable intellectual property that is often incurred due to someone else's sloppy business practices. This is why it is not uncommon for entrepreneurs to form an LLC instead of a joint venture when forming a new business. Not only do they get the flexibility that an LLC provides, but they also maintain full ownership of the business, rather than having to share it with someone else. This, in turn, helps to protect the intellectual property of the business and allows them to maintain control over the operations of the company.
The Options For Organizing Your Business
The best option for your corporation depends on your situation. If you are a new business owner who does not yet have established resources, then you should consider registering with the state as a Sole Proprietorship. The state requires no employees and no physical address, so it is the simplest and most convenient way to establish a business. The disadvantage is that because you are not officially a business, you have no legal protection in case things go wrong.
If you are a small business owner who wants to protect your personal assets in case of a business failure, then you should consider creating an LLC or a partnership. You can be officially recognized as a business entity by the state while still owning your personal assets.
The disadvantage of an LLC or a partnership is that it is more complex and requires more work to establish and operate than a Sole Proprietorship. You will need to hire an attorney to help you set up the business and file the proper papers with the state. Having an LLC or a partnership also means you have more than one set of books to keep track of. The separate entity structure will not only affect how you file your taxes, but it will also require you to keep separate sets of books.
To recap: if you are a new business, register with the state as a Sole Proprietorship. If you are a business owner who wants to protect his or her assets in case of a business failure, then register with the state as an LLC or a partnership. Never hesitate to consult an attorney if you are not sure which form of business to choose or if you have any questions about how to establish a business in the United States.