What are the pros and cons of doing business as an LLC vs. being a sole proprietorship?

Answer 1

If you are a sole proprietorship and you lose your socks and file bankruptcy then you can lose your house, car and anything else you personally own. If you are an LLC and that happens they can't touch your personal possessions. In this case the LLC is better. Watch for tax rates as well.

Answer 2

A lot of the responses I read on this question are just plain wrong. For example:

(1) There is no cash amount your company has to earn to become an LLC. I have an LLC that made maybe $50 last year (I don't actively pursue business with it, but if business comes my way it is better for me to do it through my LLC than personally because I protect my personal assets if I am ever sued by a client).

(2) An LLC is great for 1 person or 1000 people to form.

(3)The only cost involved in filing an LLC is the fee charged by your state's secretary of state to put the company on its record books, and its a pretty cheap fee, although it varies by state. In my state its a one time fee of $125.00.

(4) I highly recommend you do not go sole proprietor because of the risk of losing your personal property (car, house, savings, checking account, retirement funds, etc.). By forming an LLC, if business does not go well and you have to close shop, only the accounts of the LLC are at risk.

(5) THERE IS NO LIMIT TO WHAT AMOUNT OF CASH THE LLC PROTECTS!! The term "limited liability" does NOT mean that the amount of protection is limited in any way. "Limited liability company" is called that because it limits (meaning stops) your personal liability for any business debts but is not a separate corporate entity for tax purposes (meaning its income goes on your personal tax return) like a corporation can be.

(6) An LLC owned by 1 person DOES NOT FILE ITS OWN TAX RETURN. In 99% of states people forming LLCs can only file the LLC profit on their own, personal tax returns. This means that the money the LLC earns is taxed at the personal tax rate, not the corporate tax rate. (Only my state (and maybe 1 other) say that an LLC can file either under a person's tax return or as a separate entity (you make the choice on your application for a tax business number from the IRS) - that is the rare exception.)

(7) Having 0 or 100 shareholders will make no difference to an LLC's liability, you will still not be personally liable. (In general, personal liability happens only when illegal conduct or conduct that is bad for the company but for you, as a person good.)

(8) Also, owners of an LLC are NOT shareholders. Shareholders are owners of corporations (an LLC is NOT a corporation - their legal and tax definitions are very different). Owners of an LLC are called "Members." Do not confuse the terms - they do have legal and tax significance.

For most people starting a new business an LLC is the best way to do business (but you should check with an attorney in your state to be 100% sure). Beware, however, although you don't mention what type of business you are starting, that your state may require you to get a license before you open up - whether as an LLC or a sole proprietor. For example: if you are going to be doing sales you will need some type of vendor's license. States require some folks, like plumbers, engineers, etc. to get licenses before they can legally conduct business. Call your local secretary of state to see if they can help you figure out if you need a license.

Answer 3

The sole proprietorship is fine if you're doing business alone (or maybe with a spouse) - the paperwork is the simplest, and it's the easiest way of doing business. The LLC protects you from personal losses due to lawsuits, etc, as only the business assets would be at risk.

Answer 4

A sole proprietorship is company, not always a corporation that you share the total burden of profit and loss, and you are taxed as personal income. While the LLC is a form of corporation that you have limited amount of personal exposure and the corporation has to file its own tax ID and you may be an employee or the principle of the corporation.

This all depends on what you are doing for a business, what you see in the future for yourself in that business.

Answer 5

It really depends on your situation and what kind of business you are running. The difference between the two is liability. If you file for bankruptcy as a sole proprietor or are sued for anything your personal belongings are fair play. Your personal assets are protected as an LLC. It obviously costs more to become an LLC and takes a little bit of an effort but is often well worth it. Here is a good article on this matter that explains it in a little more depth http://www.home-business-expo.com/8172006_Incorporating.asp.

Answer 6

In an LLC your liability is limited and generaly the stock holders cannot be held responsible for the debts incurred by the corporation. on the down side income and dividends are taxed twice (once for the corp, and once for the individual).
In sole proprietorship your income is only taxed once but you are solely responsible for the debts incurred the government treats you and the business as a single entity

Answer 7

This Q has more to do with your state than federal IRS.
the taxes are the prime consideration and dependeing upon the state you live in the liability is even more important. I believe you'll find that beyond saving a few bucks at the "Co" leval which you'll pay tax on at an individual leval (which could be benificial-you'll have to run the numbers both ways to decide) ,you'll find that you still have personal responsibility for debts of your "Corp" or LLC depending upon whether you have shareholders and /or the amount of share holders

Answer 8

llc are much better for partnerships, especially w/ more than 1 partner and its probably the best way to go too if 1 of ur partners is not a U.S. citizen.
sole proprietorship is better if its just u and u dont have a business that needs incorporation protection

Answer 9

Basically operating as a LLC offers some protection angainst your personal assets from creditors. In a sole propreitorship your personal assets are fair game in all cases. LLC's generally cost more money to form and you might have to prepare seperate tax return for your state but can be included in your personl federal tax return.

Answer 10

LLC is for a business that is doing well over $150,000 in receipts/year.
it is costly, but good for the company if you own real estate.
The sole prop. is for smaller companies. you are often under attack by taxes if you do not protect yourself properly.
it all depends how much you make per year. Talk to an accountant that is recommended to you. You do not want to not have one.