When starting your business there will be many hurdles that you will have to face. One of those is going to be which business structure you decide to start with. I say start because the end goal should always be to expand and achieve greatness. Research shows that most small business owners either start off as a single-member llc or a sole proprietorship.
Understanding the pros and cons, as well as the responsibilities that come with each business structure is vital to operating your business. This will help you to pick the right structure for your business and knowing this will help when you file with the state. Let’s get into it!
What is a Single-Member LLC?
A single-member llc (limited liability company) is defined as a limited liability company owned and operated by one person. You would operate within this business structure the same way you would operate a regular limited liability company. The only difference between the two is how many owners are operating the business and if you have employees or not.
Some of the advantages of operating a single-member llc (limited liability company) are:
- The protection of your personal assets. Operating as an LLC (limited liability company) means that if your LLC (limited liability company) owes a creditor, that creditor can only collect the assets that are tied to the LLC (limited liability company) and not the owner. You want to make sure that you have a separation between you and your business, especially when it comes to money.
- Flexibility in tax filing. Operating as a single-member llc (limited liability company) also means that you can chose which way you would like to file your taxes. I found that single-member llc’s are considered “disregard entity” because there is no separation between you and your business. So, basically your business will be put in the same category as a business operating as a sole proprietorship, however you can choose to be taxed the same way as a C Corporation or S Corporation.
Make sure that when you go to file your taxes that you completely understand how you are filing and why your are filing that way. Do not agree to anything that you do not understand completely and please go to a professional tax company. Make sure you are there throughout the whole tax filing process and ask questions!
Now when it comes to disadvantages there are a few and they are listed below.
- The responsibilities and cost. If you are starting with a small budget then you want to make sure that you include the cost of creating an llc (limited liability company). Operating a llc (limited liability company) means that you have to make sure that you pay all fees associated at state, city, and county bylaws. Yes you might have to getting licensing at every level (check with your state, city, and county to figure this out).
- Restrictions on naming. When you file for the state to make your business an llc (limited liability company) you will be required to include llc or limited liability company in the name (Ex: Mike’s Bike Repair, llc). This name would also need to be different than your domestic and foreign LLCs.
- Publication requirements. Now this is not likely, but you still want to check with your state. This just means that you will have to print an ad in the newspaper stating that an LLC has been formed. Again this may not be a requirement for your state and if it is then you will need to follow the right channels to get this done.
- Filings. Depending on your state’s rules you may need to file periodically (annually or biannually) and/or franchise taxes.
Do not let this list of disadvantages discourage you from starting your business. If right now these disadvantages are too big of a risk then you can opt into starting as a sole proprietorship. However, if you start a proprietorship then you should set a reasonably goal of when you want to be able to make your business an llc, and who knows you may even have an employee by then.
What is a Sole Proprietorship?
A sole proprietorship is defined as one of the most basic business forms. Operating as a sole proprietorship means that you and the business is one entity, your business is unincorporated and owned by a (sole) proprietary. Operating in this business structure has its advantages though. They are:
- The Cost. This business structure does not require any start up fees. It makes it easier for people with little to no funding to open and operate a business. This business structure is also ideal for people who do not know if they tulle want to open a business.
- Your control of the business. Since a sole proprietorship can only have 1 (one) owner, you have complete control and ownership of the business.
- Tax Filings. Filing your taxes for a sole proprietorship is quite simple, because you just need to simple file a Schedule C with the IRS.
When dealing with your taxes no matter which business structure you are establishing, you want to seek out a professional. Do not attempt to do anything tax related by yourself. This way you can ask the appropriate questions and learn more about deductions that you may be able to receive. Tax professionals are here to help guide you through this process effortlessly, plus if the IRS ever ask questions, the company where you filed taxes can help you.
When it comes to the disadvantages, it may make you rethink things honestly, but don’t let it. Let it motivate you to push through and eventually move up to an LLC (limited liability company). Below is a list of the disadvantages associated with having a sole proprietorship:
- Liability Exposure. Having a sole proprietorship means that if your business owes a creditor and the business can not pay the debt, the creditor can and will go after your personal assets to alleviate the debt.
- Securing Loans. Operating as a sole proprietorship makes it difficult to get business loans because the banks are reluctant to give them funds. However it is not impossible, you will just have to look into alternative loans.
- Business Lifespan. Once you decide to retire or upon your death your business will cease to exist.
If you have limited funds then this is the best pick for you at the moment. Sometimes it is better to just start and then as your business progress you makes the changes needed for your expanding business.
The Similarities
We have gone over the pros and cons of each business structure, now we need to talk about the similarities. Although these are two different business structures they have a few things that they do the same. Below is a list of some of the similarities they have:
- Tax Obligations. No matter what business structure you chose to operate under you are obligated taxes. You will need to file your Schedule C of form 1040. All of your net income will be taxable and no it doesn’t matter if its still sitting in the bank or not.
- Keeping Records. You need to make sure that you are keeping records of everything. This will help when filing your taxes, it ensures you will receive the maximum deductions your business is entitled to.
- Employees. If you decide to acquire employees you will need to get a taxpayer identification number (EIN). You can get this for free on the IRS website (irs.gov). However, if you do not have employees you can just operate under your social security number.
- Permits and Licenses Needed. You need to make sure that if you have permits and licenses through the state, city, or county, that you keep up them. Make sure they do not expire and how early before the expiration date you can purchase them.
- The DBA Option. If you are a sole proprietor you can choose to operate under an “assumed” name for the business. You can also do this for an LLC (limited liability company) however it is not necessary.
Showing the similarities may seem redundant because we discussed the pros and cons of each, however seeing them listed together helps my brain to recognize them more clearly. The similarities help you to realize that if you have to start off as a sole proprietorship, by the time you get to establish your business as an LLC (limited liability company) you will already know half of what you need to operate. Starting as a Sole Proprietorship actually will make the transition to an Llc (limited liability company) smoother.
The Differences
The differences between the two business structures include your legal liabilities, how to dissolve your business, and your requirements that you are obligated to at the state, city, and county levels. You need to know the differences between the two, especially if you are starting off as a sole proprietorship. Below is a list of the differences between the two business structures:
- Legal Liabilities. Operating as an LLC (limited liability company) has a greater advantage when it comes to legal liabilities and the protection of the company. As mentioned before if you have an LLC (limited liability company) and your business owes a creditor, the creditor can not go after your personal assets. That is not the same for a sole proprietorship. If a sole proprietorship owes a creditor, the creditor can legally go after the owner’s personal assets.
- Dissolving of Company. If you have a sole proprietorship you can easily close down your business. You simply just stop working and of course if you have a DBA or any other licenses or permits, you will need to cancel them.
- State, City, or County Regulatory Requirements. LLCs (limited liability company) are required to keep up with filings and fee cost then they initially start and it is an ongoing process throughout. They will have quarterly or yearly filings or fees that they have to handle as long as they are in business. A sole proprietorship is the opposite because they have no or very few regulatory requirements.
You should now be able to pick which structure is best for you starting off. I say go with what your budget will allow. Do not try to move faster than you should. Remember slow and steady wins the race every time. This should not be something that you discuss with everybody because remember at the end of the day if anything goes wrong it falls on you the business owner.
I have operated under both an LLC (limited liability company) and a sole proprietorship. I jumped the gun and just went straight for an LLC (limited liability company) not realizing how much I had to be accountable for and because of that I had to let my business go and start over. Now I have learned and I am still learning how to run my business properly, so that way I can help you not make the same mistakes I made starting out.
I hope this has helped you by making the decision a little easier to make. You need to be comfortable and secure and if you are doubting yourself, then start as a sole proprietorship because then if you don’t like it you can alway stop and go back to the drawing board. Whatever you do just start the business because you won’t know unless you try.
I sincerely hope this post has provided you with some valuable insights and helped you learn something new! If there is a particular topic you would like us to dive into of if you happen to have any questions at all, please do not hesitate to reach out to us directly, just visit our contact page. We are always more than happy to assist you and offer additional, more in-depth information whenever it is needed. Do not forget to share this post with your friends, families, and anyone else who might find this blog helpful – your support truly means the world to us, and we deeply appreciate it!
References:
Single- Member LLC by The Carta Team. Retrieved from: www.carta.com
Single- Member LLC vs. Sole Proprietorship: Advantages and Disadvantages by Jennifer Woodside. Retrieved from: www.wolterskluver.com