If you’re the sole owner of a business, you may have pondered the question: Should I operate as a sole proprietor or a single member LLC?
Decisions, decisions! So what else is new when running a business, right?
There are always choices to make—and deciding which business entity type will be right for your company is one not to be made lightly.
The type of business structure you choose will have legal and financial implications. It will also affect the time you spend on efforts to keep your business compliant with whatever rules must be followed for the legal entity. For these reasons, I recommend consulting with an attorney and accountant (or tax advisor) so that you can better understand your options and make an informed decision.
Sole Proprietor vs. LLC: A Side-by-side Comparison
Below, I’ve created a table to help you understand some of the differences between a sole proprietorship and an LLC (Limited Liability Company). By having this side-by-side comparison for reference purposes, I hope that you’ll be better able to ask your legal and accounting resources the right questions to draw out the insight you need.
|Starting the Business||No business registration paperwork is necessary to establish a sole proprietorship. No matter in which state a single-owner business operates, it will be considered a sole proprietorship unless the owner files paperwork to register the company as some other business entity type (e.g., LLC or corporation). Note that other requirements may apply to legally operate the business depending on where the business is located and what type of business activities it will conduct.||To form an LLC, states require filing documentation called "Articles of Organization" (sometimes called "Certificate of Organization" or "Certificate of Formation"). The paperwork typically isn't extensive nor expensive. Requirements and costs vary by state. Information required to file for Articles of Organization might include: the name of the business, statement of purpose, whether the LLC will be perpetual or end at a specific time, principal place of business, registered agent, management structure of the LLC.|
|Registering the Business Name||This will involve filing a DBA (Doing Business As), also known as a Fictitious Name, if using a business name that doesn't include the owner's first and last name. For example, if John Wilcox operates his business as "John Wilcox Plumbing and Heating," he will not need to do a fictitious name (DBA) filing. If, however, he wants to call his business, "West End Plumbing and Heating," he will need to submit the fictitious name to the state for approval. Some states also require advertisements or notices be run in a local or legal newspaper to disclose to the public who is operating the business under the DBA.||When registering an LLC, the business name is automatically registered, so there’s no need to file for a fictitious name. In some states, it's possible to reserve a name in advance of formally registering the business. Name reservations expire after a certain amount of time if not renewed or if business registration isn't completed.|
|Personal Liability||A sole proprietorship and its owner are considered the same entity. No legal separation exists between them. The business owner assumes personal responsibility for all debts and legal concerns of the business. Therefore, if someone sues the business or the business cannot pay its bills or loans, the owner will be held liable. That means the owner's personal assets and property will be at risk of being used as restitution or payment.||A sole proprietorship and its owner are considered the same entity. No legal separation exists between them. The business owner assumes personal responsibility for all debts and legal concerns of the business. Therefore, if someone sues the business or the business cannot pay its bills or loans, the owner will be held liable. That means the owner's personal assets and property will be at risk of being used as restitution or payment.|
|Income Tax Treatment -- Default||The business is not recognized as its own tax-paying entity; its income and losses get passed through to the owner's personal tax return via IRS Schedule C (Profit or Loss from Business form). Tax rates for individuals are applied to a sole proprietor's taxable business income. Business income is also subject to self-employment taxes (Social Security and Medicare). Because sole proprietors' income tax, Social Security, and Medicare aren't deducted from a paycheck from an employer, business owners usually must make quarterly estimated tax payments to the U.S. Treasury, the state, and sometimes the local tax authority.||The business, unless the owner makes a special tax election, is considered a disregarded entity. It is not recognized as its own tax-paying entity. Business tax obligations flow through to the LLC owner.|
|Income Tax Treatment -- Alternative Options||None||If it meets all eligibility requirements, an LLC can opt for corporate tax treatment as either a C Corporation or S Corporation. This might help LLC owners reduce their self-employment tax burden, as Social Security and Medicare only get applied to the only the owner's wages or salary rather than all taxable business income. With C Corp tax treatment, the business files its own income tax returns, and business profits are taxed at the corporate tax rate. For some LLCs, this may prove a disadvantage because some profits get taxed twice--once at the corporate level and again at the individual level--when distributions are paid to the LLC owner. With S Corp tax treatment, income tax obligations pass through to the owner's personal tax returns (accompanied by IRS Form 1120-S).|
|Ongoing Business Compliance Requirements||Because the state doesn’t recognize a sole proprietorship as a legal entity in and of itself, no corporate compliance requirements exist. However, other ongoing requirements may apply to legally operate the business.||LLC compliance requirements vary by state. Often they include: filing an annual report with the state (sometimes these are every other year or on some other interval), keeping business funds and transactions completely separate from from the owner's, filing Articles of Amendment if there are any major changes to the LLC that must be updated in the LLC's Articles of Organization.|
Business Requirements That Apply to Sole Proprietors and LLCs
For both sole proprietorships and single-member LLCs (and corporations, too), some obligations are universally required.
Several examples include:
- Pay income taxes (federal, state, local income tax; sales tax (if applicable); payroll taxes (if the business hires employees)
- Obtain an EIN (usually required for opening a business bank account and always if hiring employees)
- Comply with the local area’s zoning requirements
- Request W-9s from independent contractors and send them 1099 forms at tax time.
- Obtain and renew applicable business licenses and permits.
These come with the territory of owning a business and should never be ignored. As I mentioned earlier, it’s very important for entrepreneurs to get professional legal and accounting insight to make sure they cover all the bases.
About Business Licenses and Permits
Depending on where a business is located, the industry it’s in, and the business activities it carries out, it might need to obtain a combination of federal, state, and local licenses and permits. I recommend researching the requirements in that order.
Federal licenses apply to businesses in the following industries:
- Alcoholic beverages
- Firearms, ammunition, and explosives
- Fish and wildlife
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Nuclear energy
- Radio and TV broadcasting
- Transportation and logistics
State and local licenses and permits requirements will depend on the nature of your business activities and where your business is located. Some of the most common include:
- Sales tax permit
- Zoning and land use permit
- Building permit
- General business license
- Occupational or professional license (e.g., cosmetology, real estate sales, accounting, law practice, medical car)
- Health permit (often required for restaurants, food trucks, nail salons, tattoo artists, etc.)
- Home occupational permit (for operating a business from home)
- Fire permit (if operating a business that’s open to the public or that uses flammable materials)
Our CorpNet website provides details about many different types of licenses and permits, so I encourage you to check out that extensive list to gain a better understanding of their purpose and whether your business might need them.
Resources for Small Business Owners
I have said it twice before in this article, but I would be remiss not to emphasize it one last time: When you’re deciding on what legal structure to choose and figure out what steps you must take to successfully (and legally) launch your business, consider seeking the guidance of an attorney and an accountant (or tax advisor). Look for professionals with business expertise and experience working with business owners so that you have a team of trusted consultants who can help you weigh the pros and cons specific to your situation and entrepreneurial preferences.
A few specific items that I believe you’ll find helpful include:
- Starting a Business Checklist
- Name Your Business
- Fictitious Name Registration: Know What It Is and Why You Need One
- Business Name Restrictions: What to Know Before Registering Your Business
- CorpNet B.I.Z. (Business Information Zone) – For monitoring your upcoming compliance filings
- What an LLC Statement of Information Is and Why You Need One
- What Is the LLC Tax Rate?
- Benefits of an S Corporation
- How to Apply for an EIN Number
- Trademark vs. Service Mark
Prepare to Launch
Remember that as you’re ready to move forward, CorpNet is here to handle all of your business registration and compliance filings—no matter where you are in the 50 states of the U.S.
Our filing experts will take the pressure off of you and save you time and money as they make sure all of your documentation is submitted accurately, on-time, and cost-effectively.
We can help you via:
- Registering a fictitious name (i.e., filing for a DBA)
- Preparing and submitting your Articles of Organization. (We can even help you determine your filing costs through our online Business Price Quote tool.)
- Filing for S Corp election
- Serving as your Registered Agent
- Applying for and renewing business licenses and permits
- Applying for an EIN
- Registering for a trademark or service mark with the USPTO
- Filing initial and annual reports
Contact us today to get started on your journey to business success!