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Tax Benefits Of An Llc Vs Sole Proprietorship

Llc Vs Corporation: How They Are Formed

LLC vs Sole Proprietor: Tax Benefits, Liability Protection, Costs. Which is Best for Your Business?

You form a corporation or LLC by filing a certificate of formation with the Texas Secretary of State. The certificate contains the basic information about your business entity, including its legal name and the name and address of a registered agent, a person or business within the State of Texas that is authorized to receive legal papers on the entitys behalf. You can serve as your own registered agent provided you actually live in Texas.

You Have Total Control:

Total control is what a lot of Sole Proprietors want and under this structure, thats exactly what they get. Youre the boss in this scenario, reporting to no one, making all of the key operating decisions. This dynamic is popular for first-time business owners as they look to get their feet wet while also establishing their name.

How Do Llcs Avoid Taxes

By separating salary from business profits, the owner saves a slight amount in taxes by avoiding payroll taxes on the amount received as an S-Corp distribution. But the S-Corp distribution business owners receive is taxed at normal, ordinary income tax rates according to their individual income tax bracket.

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Sole Proprietorship Vs Llc: Advantages And Disadvantages

First-time entrepreneurs often get confused when facing the sole proprietorship vs LLC dilemma.In a nutshell, a sole proprietorship is an enterprise owned and run by one person. On the other hand, a limited liability company exists independently of its owners and shareholders.

Although the main difference is clear, each of these business structures has its own set of advantages and downsides. The only way to make the right choice is to develop an in-depth understanding of the two concepts.

Heres what you need to know:

If You Have A Sole Proprietorship When Should You Form An Llc

S Corp vs LLC: Should you incorporate?  Stride: Benefits for ...

It is time to go from a sole proprietorship to an LLC when you are ready to grow your business and earn a profit.

Sole proprietorships are only good for very low-profit/low-risk businesses.

Example: A sole proprietorship can be a good way to start out if you are doing business on a small scale or want to try out a low-risk venture to see how successful it will be.

Forming an LLC allows business owners to grow their businesses and take on risk. This is because LLCs provide personal liability protection.

What is personal liability protection? When a business owner has personal liability protection, they cant be held personally responsible if the business suffers a loss. This means personal assets are protected.

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Forming A Sole Proprietorship Vs Llc

Lets look at the distinctions of creating an LLC vs. a self-employed business. Forming a sole proprietorship can be as simple as getting to work. Depending on what kind of work you do, you may have to obtain licenses, permits, zoning clearances, or other permissions from your local government. If you so desire, you can form a legal entity and file an assumed business name, and to make tax season more bearable, obtain an EIN .

Forming an LLC is a little more involved, but still a relatively simple process. Youll need to choose a legal name your LLC, and be sure to check your proposed name before going to file youll want to be sure youre choosing a name unique to your business and and check with an attorney before using a name others have protected with a trademark. Youll also need to choose a registered agent. This could be yourself if youre a single-member LLC, or one of your business partners in the case of a multi-member LLC.

Youll then need to file articles of incorporation and create an operating agreement, as well as paying a filing fee. Having a business plan in place can make aspects of this step much simpler as you form an LLC. In some states, youll be required to obtain your EIN for tax purposes.

Llc Vs Corporation Ownership

Corporations issue shares of stock to their owners, who are called shareholders. Corporate shares are easy to transfer from one owner to another, and therefore a corporation can be a good choice for a business that anticipates having outside investors or making a public stock offering.

The owners of an LLC are called members, and instead of shares, each member owns a designated percentage of the company, sometimes called a membership interest.

Membership in an LLC may be more difficult to transfer than shares in a corporation. An LLCs operating agreement will typically specify whether and how membership interests can be transferred.

In some states, if a member leaves an LLC and the operating agreement does not specify otherwise, the LLC must be dissolved.

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Differences Between Llcs And Corporations

Both these business types will require you to file business formation documents with the state. Both protect company owners from personal liability for business obligations. In general, corporations have a more standardized and rigid operating structure and more reporting and recordkeeping requirements than LLCs. LLC owners have greater flexibility in how they run their business.

Taxwise, LLCs have more options than corporations. LLCs arenât tied to one particular tax classification and can be taxed as sole proprietorships, partnerships, C corporations or S corporations.

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Can A Sole Proprietor Have Employees

LLC vs Sole Proprietor: Which is Better for Your Business?

Yes! You can hire one employee or several. Remember that youre responsible for paying employer payroll taxes, withholding employee payroll taxes, following local labor laws, and paying your workers according to updated worker classification rules.

LLCs can have employees, too, and will pay them according to the same rules.

Pro tip: Did you know that employing your own children may have special tax benefits exclusively for sole proprietors? The IRS allows you to hire your own children and write off their wages as a business expense, just like any other employee. You can also potentially set-up retirement plans for your children to help with your savings goals.

One additional perk is that you dont have to pay Social Security or Medicare taxes, just as long as its the child of the owner sole proprietorship or the child of both partners for a partnership. The child must also be under 18. This benefit doesnt apply to corporations or LLCs with corporate tax structures.

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Should I Start A Sole Proprietorship Or Llc

The easiest way to answer the question regarding whether you should start an LLC or a sole proprietorship is to look at some of the big pros and cons of each option.

A sole proprietorship, for example, is one of the easiest business entities you can launch. Basically, you just get to jump right in with both feet and start working.

As a sole proprietorship, you are technically the business. This, however, does mean all of your business profits and losses will be factored into your individual taxes. With an LLC, you can sometimes avoid this issue.

The biggest downside to going with sole proprietorship is the fact that you have absolutely no protection. If someone decides to come after you, they can take your business, your house, your car, and all of your money.

One of the main disadvantages is setting up your business as an LLC isnt nearly as simple as sole proprietorship. You have to file documents and complete paperwork all of which includes filing fees. Basically, you have to jump through a few hoops before you can dive in and start working.

When youre deciding whether to start a sole proprietorship or LLC, it really comes down to your personal situation. I can help you make that decision if you email me at

What To Know Before You Begin

Deciding how you want to structure your business legally is one of the first and primary business decisions you will have to make. Depending on which type of business structure you choose, there are different levels of protection safeguarding your personal assets and shielding you from personal liability. There are also significant tax implications for each type of business structure.

There are several factors that you should take into consideration when making this decision, such as:

  • The type of industry you are in.
  • How many owners are involved.
  • The size of your business.

One of the responsibilities of a business owner is to do his or her due diligence. This means you should objectively analyze the advantages and disadvantages of each business structure and make an informed decision that will be best for the business.

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List Of Disadvantages Of Sole Proprietorship


1. Personal and Business Assets One of the drawbacks of sole proprietorship is that the owners money is tied to his business in the sense that finances of the owner and the business are one and the same and that there is no legal separation between the two. If the owners business encounters a problem or incurs debt and other obligations, he can risk losing his personal money to settle these issues. Moreover, his personal properties can be at risk if the business fails or if it faces legal actions from disgruntled employees as opposed in a corporation where personal assets are not connected to the business assets. And although sole proprietorships are not safe from legal issues as other business structures, the owner has to deal with these problems alone compared to owners of corporations where there are other people involved and not only one is liable.

2. Less Capital The flipside of not having partners or other investors in a business is not being able to come up with a large amount of capital to start and sustain the company. Even if the business idea is feasible and looks lucrative, coming up with a substantial amount of money to get the business going can be difficult after some time if there is no additional capital. Unlike in a corporation where there are investors who can make additional investments should the need arises, sole proprietorship often results to some owners relying on their personal money and loans to operate the business.

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Which Is Better Llc Or Sole Proprietorship

Determining which business structure is better depends on the type of business and business needs. Both an LLC and a Sole Proprietorship offer different advantages and disadvantages.

Sole Proprietorships are extremely simple to set up and are subject to less government regulation than an LLC. For a business owner that is looking to make minimal profit and has low risk, a Sole Proprietorship is a great option.

If a company is looking to have more than one owner, or carries a higher risk, an LLC would be the better option because owners are protected from business related liabilities.

For more information on how to make the right choice between an LLC and a Sole Proprietorship,read this article.

What’s The Difference Between Sole Proprietorship And Llc

Solet’s get to it. What’s the difference between an LLC and a sole proprietorship?

  • Limited Liability Company . An LLC is a type of business structure that, akin to its name, removes any liability that the business encounters from the owner or owners of the company. Each state regulates LLCs a bit differently, but there are many similarities that span from coast to coast.
  • Sole Proprietorship. A sole proprietorship refers to an unincorporated business. You may have a registered trade name, but that’s about it. As with an LLC, income is taxed as personal, and there aren’t any state-level government regulations, but you also don’t have any protection if you encounter legal liabilities.

The type of business you operate can help determine which you should choose. For example, if you perform construction handyman services, a sole proprietorship will suffice in most cases. If your business provides consulting services, however, it may be more beneficial to protect yourself by removing liability with an LLC.

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Liability Advantage Of An Llc

The major advantage for choosing an LLC is the liability protection. Sole proprietors merge business and personal life, making them personally liable for anything associated with the business.

When liability is low in general, the sole proprietor model is attractive. A media person, for example, can often operate as a sole proprietor without incurring any significant liability. A chauffeur service, however, places customers in a moving vehicle, and liability skyrockets in the event of an accident.

If the chauffeur operates as a sole proprietor, the injured party can sue for personal assets, resulting in the chauffeur losing personal savings and assets such as real estate. If the chauffeur operates under an LLC, however, the personal assets are separate from the business. The business is exposed in a lawsuit, but the owner’s personal life is protected. The distinction is important, and liability protection is a primary reason for forming an LLC.


Can An Llc Buy A Sole Proprietorship

LLC Vs. Sole Proprietorship Tax Benefits

Generally, the LLC would step into the shoes of the prior owner so the business can keep operating uninterrupted however, if the business you want to buy is a sole proprietorship or partnership, your LLC can’t simply buy the business as a single entity. … The LLC could then re-form the business under its own authority.

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Llc Vs Sole Proprietorship Tax Differences

Choosing to be a sole proprietor vs LLC doesnt directly have anything to do with taxes. Even if you form an LLC, youll continue to pay taxes as a sole proprietorship, where the profits pass through to the owners personal income. This is the default tax treatment for single-member LLCs.

If your LLC has multiple owners, youll each pay taxes based on a percentage of ownership. The separation of an LLC from the owner for liability purposes isnt what determines your tax situation.

In tax terms, the biggest difference between a sole proprietor and LLC is that an LLC has whats called tax flexibility. That means you can request to be taxed as an S Corp or C Corp.

There are differences between S Corps and C Corps, especially when it comes to taxes. You can consult with a tax advisor on whats best for your situation or read our guide to S Corps vs C Corps.

The most important difference is that C Corps pay corporate income taxes in addition to requiring their owners to pay personal income tax on their salary and corporate distributions this is called double-taxation. S Corp owners only pay personal income tax on their wages and the company profits that are passed through to their personal tax return.

The bottom line is theres not a big difference between LLC vs sole proprietorship taxes, unless you elect to have your LLC taxed as a C Corp or S Corp.

Similarities Between Llcs And Sole Proprietorships

When comparing LLCs and sole proprietorships side-by-side, its important to recognize that these two business structures share some commonalities.

Heres a quick list of the similarities between LLCs and sole proprietorships:

  • Income and expenses must be reported in Schedule C Form 1040.
  • Net income is taxable, regardless of whether or not cash is withdrawn from the business.
  • They have similar rules for tax deductions .
  • An EIN must be obtained if employees are hired.
  • Any industry-specific business licenses and permits at the state and federal levels are still required.
  • LLCs and sole proprietors both have the option to register a DBA name.

As you can see, from taxation to paperwork filing, LLCs and sole proprietorships do have a handful of things in common.

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Which Is Better An Llc Or S Corp

An LLC is better for a single-owner and likely better for a partnership. An LLC is more appropriate for business owners whose primary concern is business management flexibility. This owner wants to avoid all, but a minimum of corporate paperwork does not project a need for extensive outside investment and does not plan on taking her company public and selling the stock.

In general, the smaller, simpler, and more personally managed the business is, the more appropriate the LLC structure would be for the owner. If your business is larger and more complex, an S corporation structure would likely be more appropriate.

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