Sole Proprietorship Vs. LLC

The business structure, that is chosen, has a significant bearing on a number of factors that influence the day-to-day working of an enterprise. The way the entity is taxed, the degree of administrative requirements, the ease of operation, the extent of personal liability and a horde of others factors have a distinctive say on the working of a business and these in turn depend on the business structure. Hence, the discussion on sole proprietorship vs. LLC assumes a great deal of significance.

Difference between Sole Proprietorship and LLC
A sole proprietor owns an unincorporated business that is not registered with the state unlike a corporation. There is very little government regulation since it is not a separate legal entity. The proprietor is entirely responsible for the debts and the assets of the company and reports business income as personal income. Although, unlimited liability is a distinct disadvantage, a sole proprietorship is not taxed at the entity level for the simple reason that it is not considered a separate legal entity!

A limited liability company enables entrepreneurs to combine the limited liability feature of a corporation with the single taxation feature of a sole proprietorship. A limited liability company can be formed by one or more members. The members may be individuals, corporations, other LLCs or foreign entities. The interest or the share of the members in the company is expressed in percentage.

Comparative Analysis of Sole Proprietorship and LLC
As far as similarities are concerned both business structures are not convenient from the perspective of raising additional capital. A proprietor has a great deal of managerial flexibility. However, in case of the members of the LLC, the flexibility as regards management is contingent on the operating agreement. In order to make a comparative study between the two, we need to examine both the similarities and the differences between the two business structures. So, here it goes . . .

Taxation
The absence of double taxation makes a sole proprietorship, a highly desirable business structure. The income flows directly to the sole proprietor and the recipient is required to pay self-employment tax. Since the Internal Revenue Service (IRS) does not recognize LLC for the purpose of taxation, the LLC may choose to be taxed as a sole proprietorship or a partnership. In this case, the members are expected to file tax returns individually while the LLC files tax returns with the IRS only for the sake of providing information. It would behoove the readers to note that although a limited liability company provides the management the flexibility and the benefit of pass-through taxation, LLC may choose to be taxed as a corporation. This is possible since the IRS does not recognize it as a classification for tax purposes.

Liability
A sole proprietor has unlimited liability and may be required to use personal property for the sake of assuaging the debts of the business or for tackling lawsuit settlements. In case of a limited liability company, there is a clear demarcation between the business entity and the members. Thus, theoretically, the members are not liable for business debts. However, by providing personal guarantees or by signing contracts in their name, members become liable for business debts. In case the book-keeping is not up to the mark, the members may be held responsible for the debts of the LLC.

Formation
The cost of formation of a limited liability company is around $700 which is the same as the cost required to form an S-Corp. A sole proprietor is not required to file with the state. In other words, the formation cost of a sole proprietorship is nil since there is no state specific filing fee.

Continuity
A sole proprietorship is terminated when the proprietor decides to quit doing business. If the operating agreement allows for the transfer of interest, the members can transfer their shares, thus, ensuring the continuity of the limited liability company.

The above discussion would have clearly outlined the differences in the business structure between a sole proprietorship and LLC. Considering the cost of formation and the ease of operation, a sole proprietorship may be a suitable business structure provided the entrepreneur is willing to contend with the repercussions of unlimited liability.