LLC vs Sole Proprietorship

LLC vs Sole Proprietorship

There are notable differences between an LLC vs sole proprietorship.

When individuals start their businesses, they go for a sole proprietorship. LLC is an extension of sole proprietorship where there are many members who own the company.

In a sole proprietorship, there’s no separate entity. Whatever the business earns is the owner’s responsibility. And as a result, the owner needs to pay personal income taxes. In the case of LLC, it’s a bit different. LLC and its members have a separate legal entity, but the members need to pay taxes as per the rates of taxes.

Sole proprietorship is managed by the owner himself. But in the case of LLC, sometimes the members (if fewer in numbers) run the business or they select few managers who run the business.

The biggest advantage of an LLC is that the liability of a member of the LLC is limited to the investments she has made. However, for a sole proprietorship, the total liability lies with the owner of the business.

Sole proprietorship business owner doesn’t worry about funds. If he has his own funds and he invests in his business, it is regarded as business funds (since business funds and personal funds are same). But in the case of LLC, the members need to keep records so that the personal funds and the business doesn’t get mixed up.

The only regulation of sole proprietorship business is that they need to make sure that they’re not using a name used by another in the similar territory. However, LLC needs to register as per the state regulation. That’s why, for a sole proprietorship business, the cost of forming an organization is quite low. But for LLC, the upfront cost is around $100 to $800.

LLC vs Sole Proprietorship Infographics

Here we provide you with the top 7 differences between LLC vs Sole ProprietorshipRecommended Courses

 

LLC vs Sole Proprietorship Differences

Here are the key differences between a Sole Proprietorship vs LLC –

• An LLC has a separate legal entity. The members of the LLC are considered separate than the business. On the other hand, in the case of sole proprietorship, the owner and the business have no separate legal entity.
• To form an LLC, one or more members need to follow the state regulations and register. To form a sole proprietorship, one doesn’t need to follow any regulation. Rather the owner needs to make sure that his business name is an original one.
• To create an LLC, the members need to expend around $100 to $800. To form a sole proprietorship, the cost is much lesser than forming an LLC.
• The members of an LLC will only have the liability to the extent of their investments. For sole proprietorship, the liability of the owner is unlimited and there’s no protection on the liability.
• The taxes for an LLC is charged on the member’s salary/profit. The taxes of a sole proprietorship are treated as personal taxes.

LLC vs Sole Proprietorship Head to Head Differences

Let’s have a look at the head to head differences between an LLC vs sole proprietorship.

Basis for comparison between LLC and Sole Propreitorship	LLC	Sole Proprietorship
Meaning	A Limited Liability Company run by the members of the company.	A single unit of business run by a single owner.
Separate Entity	An LLC and the members have separate entity.	The company and the owner in sole proprietorship doesn’t have any separate legal entity.
Forming formalities	To form an LLC, the member/s needs to register as per the state regulations.	To form a sole proprietorship, the owner needs to make sure that the name of the business isn’t same with another business in the same territory.
Fees for forming	To form an LLC, it costs around $100 to $800.	To form a sole proprietorship, there’s no cost need to be borne by the owner.
Taxation	LLC has a single taxation method. The taxes are charged on the members at a rate applicable.	For a sole proprietorship, the taxes are charged on the income of the owner. There’s no difference between owner’s taxes and the business taxes.
Liability protection	For an LLC, the members are liable to the extent of their investments in the LLC.	For a sole proprietorship, the owner is liable for the entire business. And there’s no liability protection.
Paperwork	For an LLC, there are less paperwork.	For a sole proprietorship, there’s no paperwork.

Sole Proprietorship vs LLC – Conclusion

Normally, people start their business as a sole proprietor. Later when they want to go a little big, they form an LLC and take help from other individuals. Individuals go for LLC to reduce the liability on their personal assets as well. In an LLC, one would get a liability protection which is not available in the sole proprietorship.

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