A sole proprietorship is a business owned and operated by a single individual, while a limited liability company (LLC) is a hybrid business structure that combines elements of a partnership and a corporation. Here are some key differences between a sole proprietorship and an LLC:
- Ownership: A sole proprietorship is owned by a single individual, while an LLC can be owned by one or more individuals or entities.
- Liability: The owner of a sole proprietorship has unlimited liability for the debts and obligations of the business, meaning that they are personally responsible for any debts or legal judgments against the business. In contrast, the owners of an LLC (called members) have limited liability for the debts and obligations of the business, meaning that their personal assets are generally protected from creditors.
- Management: A sole proprietorship is managed by the owner, while an LLC can be managed by the members or by a board of directors.
- Taxation: A sole proprietorship is a pass-through tax entity, meaning that the business itself is not taxed on its profits. Instead, the profits of the business are passed through to the owner and taxed at the individual level. An LLC can also be a pass-through tax entity, but it can also elect to be taxed as a corporation.
Whether it is better to set up your business as a sole proprietorship or as an LLC depends on your specific needs and circumstances. A sole proprietorship is generally simpler and easier to set up and manage, with minimal paperwork and regulatory requirements. However, a sole proprietorship does not offer any protection for the personal assets of the owner. An LLC offers greater liability protection for the owners, but it may be more complex to set up and may have more regulatory requirements. If you’re wondering if you should switch your business structure, let’s discuss it and see which is better for you.