LLC vs Sole Proprietorship

Going into business for yourself? If your company is comprised of you and nobody else — or maybe you and just a few others who’ll assist in the business — you might be wondering whether to set up an LLC or proceed as a sole proprietor.

It’s an important decision. Operating as an LLC vs. sole proprietorship has profound implications in terms of taxation, organization, filing requirements within your state, and your personal liability in the event of litigation (among other things).

Small business owners sometimes assume that a sole proprietorship is the most natural and obvious form of business for a company consisting of just one person (literally, a “sole proprietor”). Even in those cases, though, it often makes more sense for the business to organize as an LLC.

In fact, the LLC is the most popular form of business in the United States — even among individual owners and entrepreneurs. Below, we explore why so many people choose an LLC versus a sole proprietorship, and we’ll highlight the pros and cons of each.

A sole proprietorship is the most basic form of business ownership in the United States, and the only one that technically can form without you taking any direct action to create it (more on that below).

A sole proprietorship is owned and operated by one and only person. (And it must be a person — a sole proprietorship can’t be owned by a company.) It is possible for the proprietorship to have employees, but in many cases, the owner is the only person involved in running the company.

Legally, there is absolutely no distinction between the sole proprietorship and the individual who owns it. The businesses’ profits and losses are your profits and losses. If the business gets sued, you get sued — and your individual assets are on the line.

Nevertheless, a sole proprietorship can operate under its own name (a “trade name” or “fictitious name”). To do so, the proprietor must file a “Doing Business As” (DBA) form with the appropriate office(s).

It’s important to note that a sole proprietorship can, technically speaking, form by default. For example, a freelance web designer who starts offering her services on the market without filing any paperwork would be viewed as a sole proprietorship. However, most states (and often, cities and counties too) require that sole proprietors obtain licenses and/or permits before conducting business of any kind. You would also want to talk with an accountant about setting up separate bank accounts and/or credit cards for business purposes, and to make sure you report your taxes correctly.

LLC stands for Limited Liability Company. It is a simple but formal form of business ownership, and it only exists in the United States.

The LLC is like a sole proprietorship in that it allows the owner to report profits and losses on his or her own tax return.

But the LLC is also like a corporation in that protects its owner from civil liability in many lawsuits — something the sole proprietorship can’t do.

Accordingly, LLCs have developed a reputation for combining the “best of both worlds.” For that reason, it is the most popular business structure in the U.S.