The number one thing I tell people who want to start a business is to decide, right at the start if they want to become an LLC vs sole proprietorship.
These are each business structures, AKA two legal ways to create and operate a business.
Making this choice at the start of your business, before you land a lot of clients, or before you grow your social media empire, is the smartest move you can make in my humble opinion.
By getting your legal affairs in order at the beginning your business is primed to grow while also offering you legal protecting.
I can’t tell you how many people I know who skimp on getting the legal side of their business set up at the start. Also, how many problems that causes down the road.
Things like back taxes, struggles to grow, and a lack of financial structure are common problems people run into, simply because they didn’t get set up correctly from the jump.
New Business Owners: How to Decide Between an LLC vs Sole Proprietorship
It’s like eating your kale salad before they roll out the chocolate cake. You’ve done your immune system a favor. Now you get to give your taste buds the time of their lives.
But which one will make your business cute as hell and keep the cash flowing? Which to choose in the battle of an LLC vs sole proprietorship?
Here’s how to decide which one is right for you.
What to know about starting a sole proprietorship
First, what is a sole proprietorship?
It’s a business classification. It’s mostly used by freelancers who are doing business under their own name. Meaning if you are a painter and you get contracted to paint a mural on an office wall and charge then $1000 for it, you’ve just done business as a sole proprietor.
The single biggest thing you need to know about being a sole proprietor is that there is no legal distinction between your business finances and your personal finances.
So, when it comes to taxable income, or when it comes to business risk, your personal bank accounts, investments, or property holdings are all on the table.
Any debt incurred by the business is also totally on you to repay as an individual.
That’s why “sole” is right there in the name. The buck literally stops with you! You can’t have any co owners with a sole proprietorship.
The very cool thing about a sole prop is that it doesn’t require any formal paperwork to get started. So, if you are doing business as yourself, under your legal name you are already operating as a sole proprietor.
If you want to do business under another name- say you sell cookies and you’d like to sell them under the name “Sweet Delight” – you CAN do that as a sole prop. You’d just need to file paperwork with your state that you are “Doing Business As” Sweet Delight.
Depending on your state this might be free or some with a small fee.
What to know about starting an LLC
LLC stands for limited liability company.
It’s the big sister of the sole proprietorship. With an LLC, you can have multiple partners, meaning you can share the business and the liability with someone else. Your business and personal finances are separated legally with an LLC. You can even choose how to be taxed with an LLC, either as a corporation or as an individual.
LLC’s do require more work to get set up than a sole prop. You have to register with your state. Also, you have to list all the partners that are involved with the company. You may have to file paperwork each year, such as a franchise tax. Also, you may have to renew your LLC paperwork after a certain number of years.
We cover how to set up your LLC in detail in our small business starter guide! I walk you through all the paperwork, guide you through navigating a state government’s website and help you get a business EIN, another way to protect your personal assets from business problems.
LLC vs sole proprietorship Which one is better?
In the battle of LLC vs sole proprietorship, which one is best for your business really depends on the type of business you currently have. Also, where you want to go with it.
Just because you are the only one who is legally responsible as a sole proprietor doesn’t mean you can’t hire people. You absolutely CAN hire contractors to work for you has a sole prop.
That, combined with it’s low or non existent start up costs makes that an excellent choice for people who are bringing in part time, side hustle income.
An LLC is essential for anyone trying to go full time in their business. It provides the protection and legal flexibility you need to grow your business, while shielding your personal assets.
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