When you’re starting a business, you’ve got to secure funding for it, build a team, register your company, and much more. Among all of this, you also need to select the company’s structure. This is an important step that you need to take as it will define the various rights and obligations of your business.
Each corporate business structure has its advantages and disadvantages and you have to consider them well before choosing to go ahead with a particular structure.
The four main structures you can select from are:
- Sole Proprietorships
- Limited Liability Companies (LLCs)
Among these, Sole Proprietorships and LLCs are quite popular among entrepreneurs. But if you’ve got to choose between them, how can you decide?
Let’s find out.
Each business structure is taxed differently. Sole Proprietorships and LLCs both offer the pass-through taxation feature. This allows the business loss or profit to flow through to the individual and you can report the same on your personal income tax returns.
As a Sole Proprietorship owner, you’d also be required to pay a self-employment tax. The same also applies to multi-member LLCs. To avoid this double taxation, you can decide to get your LLC taxed as an S-Corporation. When you do so, all the members would start being treated as employees of the business. However, you’d have to pay corporate taxes for the S-Corporation.
The Ownership Aspect
When you’re starting a company, you’ll likely want to know about its ownership structure. Sole Proprietorship businesses are simple in that regard as only a single individual can be the owner of such a business.
LLCs, on the other hand, allow both single and multiple owners. Additionally, those owners don’t necessarily have to be individuals as well. LLC owners could be individuals, other LLCs, and even foreign firms.
The Company Formation Process
The process for forming a company varies based on the business structure you choose. While the steps required for Sole Proprietorships are few, LLCs have a slightly longer process.
Sole Proprietorships allow the business owners to start their business under their own name with ease. However, you can also apply for a Fictitious Business Name (FBN) and start operating under a separate, fictitious name.
But what about LLCs?
When you want to start an LLC, you have to file Articles of Organization. This has to be done at the office of the Secretary of State.
After that’s done, you also have to create an agreement called the LLC Operating Agreement which covers the various responsibilities and roles of the members. Finally, you’re required to pay the state filing fees and continue paying them each year.
Regardless of the type of business entity you choose, it’s essential that you go about the formation process well. You must complete all the legal requirements and paperwork correctly to make sure that the business is set up correctly.
Want to learn more about how LLCs and Sole Proprietorships are similar yet different? Check out this infographic developed by GovDocFiling.
Embed this infographic on your website:
<div style="text-align:center"><img alt="Sole Proprietorship vs. LLC: Which One Is Right for Your Business?" src="https://i.ibb.co/zRvPytQ/Sole-Proprietorship-vs-LLC-infographic-New.jpg" style="max-width: 100%;"/><div style="margin-bottom:5px;margin-top:5px">Image Courtesy: <a target="_blank" href="https://www.govdocfiling.com/blog/Sole-Proprietorship-vs-LLC/">GovDocFiling</a></div></div>
About the Author:
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.