Let's start with an astonishing statistic:in March 2021, nearly 440K new business applications were filed in the United States. If you are also planning to start a new business, you are not alone.
SummaryFormation process and costOwnership arrangementTax liabilityPackingHowever, it is important to decide on your business structure from the start.
Why so?
Indeed, the corporate structure governs your tax liability, operations and overall management.
When we talk about entity structures, sole proprietorship and LLC (limited liability company) are popular choices among entrepreneurs, due to their ease of formation.
However, there is general confusion about how these two structures differ from each other. In this article, we will delve into this topic in detail.
Let's start.
Sole proprietorships are easy to set up and manage. They can be made under the owner's name or under a fictitious name. In the latter case, you will need to apply for Doing Business As or DBA. Additionally, you will need to pay a filing fee in the state where your business is incorporated.
To form an LLC, you will need to file with the Secretary of State an additional document called the "Articles of Organization". This is an official document that outlines the LLC's operations, profit sharing, and tax provisions.
In addition to state filing fees, you may have to pay a recurring annual fee in most US states, which ranges from $50 to $500.
Sole proprietorships, as the name suggests, can be owned by a single person. LLCs are generally owned by a group of entities called "members." Members can be individuals, foreign entities, or even other LLCs, but they cannot be banks or insurance companies.
In the sole proprietorship structure, the owner can report business income on their personal tax returns. The tax is calculated on the combined income tax (personal + business). Along with this, the owner is required to pay a self-employment tax to the US federal government.
In the LLC structure, all members “transfer” the profits and losses of the business to their personal income. They can also choose to be taxed as a corporation. To take advantage of the limited tax liability associated with an LLC, members must maintain personal and business accounts separately.
Now that you know the key difference between an LLC and a sole proprietorship, you are in a better position to decide which structure is best for your business needs.
However, there are many other small differences that can have a big impact on your decision. To understand them, you can consult this infographic in GovDocFilt.
Infographic via:GovDocFiling.com
