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!
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.
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.
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.
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).
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.
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.
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!
If you get business credit, you will be able to expand and grow your business which will mean profits, success, and opportunities!
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.
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 of 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 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.
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.
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!
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.
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.
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 too all US citizens.
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!