LLC vs Sole Proprietorship vs Corporation (Which is Best?)
When you are starting a business, there are a lot of decisions that you have to make regarding your company’s structure. From liability to taxes, there are millions of things that you need to consider.
Even though you can research on your own and decide which business structure is perfect for you, we recommend that you get in touch with a professional business formation service and get expert consultation. Let’s jump into the details and compare LLC vs sole proprietorship vs corporation to see which is best for you and your new company!
Are you here to find the answer quickly? We know that as a new business owner you are already short on time so we will give you quick highlights to save your precious time!
For the majority of entrepreneurs, LLC is the best business structure. Sole Proprietorship doesn’t offer any protection in case of legal issues. Corporations are subject to heavy taxation and are complex to form. We will discuss each one of these below in detail!
Now that you know that LLC is the perfect business structure for a new startup, we will give you another quality tip. Most of us don’t have any legal background and are bound to get lost in the world of legal jargon if we start filing the paperwork on our own.
To save you from going down the rabbit hole of legal red tape, there are quality LLC incorporation services out there that you can hire to take care of forming an LLC for you. With affordable rates and quick turnaround times, you are in for a treat!
- ZenBusiness is the incorporation service that offers the best overall value in terms of affordability and expertise. They have affordable packages that you can choose according to the needs of your company!
- Incfile is perfect for those entrepreneurs who are on a tight budget and want professional help but can’t afford it. With the free starter package offered by IncFile, money is no longer a hurdle in getting your LLC up and running!
LLC vs Sole Proprietorship vs Corporation
When you are starting a new business, you will have to carefully and meticulously plan everything. If you are a small business owner who doesn’t want to form a partnership, you are left with three options.
- Limited Liability Company
- Sole proprietorship
Every option comes with its own pros and cons, which are determined by your business’s type and your future goals. Let’s begin with addressing the basic differences between each type of business entity and then we will go from there!
If you don’t form a legal business entity and run your business on your own, you are running a sole proprietorship. In the eyes of law, you and your business are one in the same thing. This business structure is very risky – in case your business gets sued in the future, you will be personally responsible for liabilities, debts, damages, etc. With a sole proprietorship, you get no protection at all.
The business is basically an extension of yourself. All the losses and profits of the business will flow through your personal tax returns. All the business profits will be reported as the personal income of the owner.
Moreover, all the liabilities will flow through the owner as well.
One of the major advantages of an LLC over a sole proprietorship is that your liability is limited. You are not personally liable for any debts that LLC has. On the other hand, the sole proprietor is liable for all debts that the business has.
If you have a sole proprietorship, the creditors can go after your car, your home, and your other personal assets. In the case of an LLC, all your personal assets will be protected.
Best for: Sole proprietorship is perfect for those business owners who are running a home-based operation and don’t want any complexities.
As a sole proprietor, you can have a business name different from your personal name. With the help of a DBA (Doing Business As), you can choose a name for your business. However, you cannot use terms such as incorporated, LLC, corporation, etc. as part of your business name.
Advantages of a sole proprietorship
- No paperwork: When you are running a sole proprietorship, you will not have to fill any paperwork other than the one required for business-specific licenses and permits. For licensure requirements, you have to check with your state department as well as with the local government in your area.
- No annual reports: You don’t have to submit annual state filings. However, some industries do require some filings, but they are majorly industry-specific.
- Tax requirements: As far as taxes are concerned, you are only going to be concerned with personal federal and state taxes. All the profits and losses will be passed through your personal tax return. You don’t have to pay any business taxes or unemployment taxes.
Moreover, you can enjoy the tax benefits of being self-employed by turning a few of your personal expenses into business expenses. For example, you can use your company car for personal use, write off travel expenses as business travel, write off costs to entertain clients, etc.
Furthermore, you can enjoy self-employed retirement plans such as SEP IRAs (Simplified Employee Pension Individual Retirements Accounts).
Disadvantages of a sole proprietorship
- No liability protection: You will have absolutely no liability protection from debts, lawsuits, and any other legal issues. This means that you are personally responsible for any issue that your business faces which places your personal assets such as a home, car, etc. at risk.
- Lack of investors: You will face difficulty if you are trying to get some funds. Investors are more likely to trust LLCs rather than unknown individuals no matter how much potential you have. This can limit the growth and development of your business due to a lack of funds.
- Difficulty establishing business credit: Moreover, you will have a hard time building business credit as well. It is hard to get debt financing as banks and other financial institutions will consider the request as a request for a personal loan instead of a business loan.
- Low market credibility: Your market credibility will be low as compared to other LLCs and established businesses in the industry. Customers are more likely to trust an established, authorized LLC rather than an individual doing business.
Limited Liability Company
An LLC is a legal entity and a business structure that you use to run your business or hold your assets such as aircraft, boats, real estate, etc. LLC is a business structure that is specifically designed to keep your personal assets separate and protected from liabilities of your business.
The owners of the LLC are protected from legal and financial liabilities of the business, including even their own negligence. The owners of an LLC are known as members. There are two types of LLCs based on the number of members.
- Single-Member LLC
- Multi-Member LLC
If the LLC is owned by one person only, it is a single-member LLC. If an LLC is owned by two or more persons, it is termed as a Multi-Member LLC.
When it comes to taxation, single-member LLCs are treated by the IRS similarly to the way they treat sole proprietorships. This means that you can attach your business income to your personal tax returns.
The requirements and process for forming an LLC vary from state to state. However, there are a few basic steps such as filing your articles of organization, assigning a registered agent, etc. that are common everywhere.
It is better if you get professional help from an expert LLC incorporation service such as ZenBusiness or IncFile and let them handle all the legal paperwork for you.
Best for: The major benefit of having an LLC is the legal protection that you get. For home-based businesses, sole proprietorships may be good enough but when your business starts to deal with multiple clients and customers, you have to go for an LLC. When you are dealing with large sums of money, it is a good idea to separate your business and personal assets and with the help of an LLC, you can do exactly that.
Advantages of an LLC
Like everything else in the world, forming an LLC also comes with pros and cons. However, its advantages far outweigh a few cons it might have. Let’s take a look!
- Market credibility: If there is an LLC attached to your name, people would know that you are a legal, authorized entity and will not hesitate before doing business with you.
- Liability protection: This is probably the biggest advantage that an LLC gives to its owners. You will get liability protection against commercial debts, lawsuits, and a lot more. As long as you set your LLC up properly, you cannot be sued for any commercial activities.
- Business financing: You are more likely to get financing for your business. Creditors are happy to give out business loans to LLCs since an LLC is an authorized legal entity and has more credibility than an individual has.
If you get business credit, you will be able to expand and grow your business which will mean profits, success, and opportunities!
- Taxation. You will get a lot of tax flexibility. You can choose to have your LLC taxed as a sole proprietorship or as a corporation, depending on your needs and requirements. You will have to pay a few additional taxes such as business franchise tax, etc. but this depends on the type of business you do and the geographical location of your company. You can choose to have your LLC taxed as a pass-through entity which allows you to file the taxes as your personal income tax returns.
Disadvantages of an LLC
As you will see below, the disadvantages that an LLC might have on paper can be easily mitigated by getting the right form of help from LLC formation companies. Let’s see what are the slight disadvantages of having an LLC.
- Paperwork: There will be a lot of paperwork that you will have to take care of while forming your LLC. However, you don’t have to be worried because there are highly professional companies like ZenBusiness & IncFile that will take care of everything for you!
- Annual state filings: You will have to submit an annual business report with your state. It is likely that you will forget the deadline and miss the filing date. However, this can also be easily taken care of by the LLC incorporation company that you hire so all you have to do is sit back and relax as you watch your business grow.
For more detail on business taxation, we recommend that you get in touch with the highly competent customer service of ZenBusiness or Northwest Registered Agent and they will guide you thoroughly. Better safe than making mistakes, right folks?
The third business structure option that you have is of forming a corporation. A corporation is mostly used to run a big company with various shareholders as well as investors. The owners of a corporation are known as shareholders.
After the formation of a corporation, you are legally obligated to form a “Board of Directors” who will oversee the company. Moreover, to run the day-to-day operations of the company, you have to choose “Corporate Officers”.
Big companies such as Apple, Microsoft, IBM, etc. are all corporations. The shareholders or stockholders own the company while the Board of Directors manages the organization. All the shareholders, directors, officers, etc. of the corporation are protected from the company’s liabilities, including personal negligence, except in a few special circumstances.
In a corporation, the profits/losses don’t flow through the owners’ personal tax returns. It is a separate legal entity that has to file and pay its own taxes.
The requirements for forming a corporation are different from one state to another. Usually, stock certificates are issued to the corporation’s owners along with paperwork that defines the purpose of the business as well as its location, along with a hierarchical structure and a few operating rules.
It is our recommendation that you get professional help for forming your business entity so that you don’t make any errors in the paperwork that might create difficulties in the future.
Best for: Corporations are generally the best option for a business that has multiple owners who are bringing in significantly large investments. Moreover, to raise additional capital for the business by selling stock shares, you have to form a corporation.
Advantages of a corporation
There are a few advantages of forming a corporation, such as personal liability protection, easy ownership transfer, etc. Let’s take a look at them briefly below so that you can make your decision easier.
- Liability protection: When it comes to liability protection, a corporation offers benefits similar to that of an LLC. Even if the corporation is sued and doesn’t have professional assets for repayment, the stockholders are not going to be responsible for any legal obligations or corporate debts.
- Ownership flexibility: The ownership of the corporation is dictated by the percentage of stocks that you own. This offers a lot of flexibility in terms of ownership transfer and business perpetuity as compared to other business entities.
Even though the specificities depend on the bylaws as well as the articles of incorporation, the ownership of a corporation is easy to sell and buy. Want to leave the corporation? Simply sell off your stocks!
- Easy access to funding: It is very easy to raise funds in a corporation by selling stock. You can’t do this with any other business structure. This is not only great for growing your business but in times of need, it also keeps a corporation from going bankrupt.
- Taxation: The type of taxes that you have to pay depends on the type of corporation you are running. C-corporations have to pay double taxation while S-corporations have various tax benefits according to the distribution of income.
S-Corporations have the choice of splitting the income between the shareholders & the business so that the tax rates are different. The income of the shareholders will be subject to payment of self-employment tax, while the remaining business money will be free from self-employment tax.
Disadvantages of a corporation
There are a few disadvantages of forming a corporation as well, such as a lengthy application process, rigid protocols, etc. By taking a look at them, the choice will become even clearer for you and your business.
- Lengthy application procedure: Even though filing your paperwork doesn’t take a long time if you take the help of an expert incorporation service such as ZenBusiness or IncFile, the overall process is going to take a long time. From drafting and maintaining corporate bylaws to appointing a board of directors, you are in for a long haul. And we haven’t even mentioned creating ownership business agreements and issuing of stock certificates!
- Rigid protocols and formalities: Apart from the lengthy application procedure and the time it takes to form a corporation, there are various formalities and regulations that you have to follow in order to maintain the status of a corporation.
From following the bylaws to holding annual meetings of the board of directors, there are various formalities that you have to take care of which can be too much at times. Moreover, there are limitations such as having only 100 shareholders for an S-corp, and that to all US citizens.
- Double taxation: Most corporations face double taxation. This means that the income of your business is taxed at the entity level and shareholder level as well. However, you can operate your corporation as an S-corp to avoid this but you will have to meet all the legal requirements for an S-corp in this case.
- Expensive: It takes a lot of money to form and operate a corporation. It is easy for an established corporation to raise capital, but forming one needs a lot of capital as well. In addition to the filing charging taxes and ongoing fees, you will need plenty of startup money as well.
LLC vs Sole Proprietorship vs Corporation – Final word
Now is the time for the million-dollar question: In LLC vs Sole Proprietorship vs Corporation, which is the best for me? As we already discussed, sole protection will provide you no liability protection and it will not help you gain credibility with investors as well as clients.
Corporations are not a bad business structure, but they are not for everyone. They are suited for big companies that have a large funding base. For most entrepreneurs who want to get their business off the ground, protect their personal assets, and get their hands on tax flexibility, an LLC is the best option!
How do I know whether I should form an LLC, corporation, or sole proprietorship?
This depends on the needs and requirements of your business. The easiest way to go is a sole proprietorship. However, you will have absolutely no liability protection as well credibility with investors and clients. An LLC will give you all that and a lot more! A corporation is perfect for those who have several investors and are going to start a huge business.
Which is the easiest to manage in LLC vs Sole Proprietorship vs Corporation?
The easiest to maintain and manage is a sole proprietorship. There are no formalities or laws regarding your day-to-day operations. The most difficult is a corporation with loads of regulations and bylaws. An LLC is the best option since it requires only a few upkeeps and requirements – that a professional LLC incorporation company can take care of!
What are the tax requirements of LLC vs Sole Proprietorship vs Corporation?
In a sole proprietorship, all your income, as well as expenses, are reported as part of your personal tax returns. For a corporation, you will be required to file your business taxes separately. An LLC is unique as it gives you the option to choose how you want to report your income. You can file the income as part of your personal income as well as separately.
In LLC vs Sole Proprietorship vs Corporation, which one offers the best liability protection?
In the case of both LLC and corporation, you will get personal liability protection. This means that whether you own an LLC or a corporation, you will not be liable for the company’s financial situation. However, in a sole proprietorship, you and your business are the same in the eyes of the law and there is no distinction between business assets and personal assets.
Which has more room to grow in LLC vs Sole Proprietorship vs Corporation?
An LLC is perfect if you expect to hire employees or add new business owners in the future since its business structure is flexible compared to that of a corporation or sole proprietorship.