Your choice of business entity is the foundation of your company. There are various types of business structures, each with its advantages and disadvantages. Two of the more common entities are sole proprietorships and limited liability companies, or LLCs.
Advantages and disadvantages of a sole proprietorship
The most significant advantage of a sole proprietorship is how easy it is to establish. You do not have to file any paperwork with the state. However, you should still take some basic business registration steps.
You do not need to set up separate business accounts or file separate tax forms. As a sole proprietor, you and you alone are responsible for all business decisions. However, many of these advantages can also end up being disadvantages.
A sole proprietorship does not allow you to separate your personal assets from your business assets. This means another party can come after your assets, including vehicles and your home if there is a dispute over a contract or payments. Also, the sole proprietorship starts and ends with you. By definition, there will be no business to pass on to future generations.
Advantages and disadvantages of an LLC
LLCs are popular because they provide a middle ground between more informal sole proprietorships and more formal corporate structures. One of the major advantages of an LLC is you are protected from personal liability should your business run into legal trouble. An LLC also provides you with more flexibility in determining who should make certain business decisions. Also, an LLC can carry on after you are gone.
Disadvantages of an LLC include have to file paperwork with the state. It can also be challenging to sell or transfer ownership of an LLC, especially if you have business partners or shareholders.
Which option is right for me?
Deciding whether to form a sole proprietorship or an LLC depends on your goals and your capacity for taking on the risk of personal liability. Discussing your plans with a skilled professional can provide clarity to your options and help you determine the best path forward for your business venture.