It’s a fantastic time to start your own business, but many budding entrepreneurs who are mulling over the prospect of entering the market don’t know what kind of company they would need to succeed. An LLC is vastly different than a sole proprietorship, for instance, and picking the wrong business model could result in market failure later on down the line. Rather than studying up so that they can make a wise decision, far too many potential business owners delay this decision until it’s too late and never end up joining the marketplace.
Should you choose an LLC or a sole proprietorship? The answer depends on your skillset, industry of choice, and financial background. Here’s how to choose between LLCs and sole proprietorships.
Understanding the difference
LLCs aren’t inherently “better” than sole proprietorships, which themselves aren’t necessarily “better” than LLCs. Which one you should rely on is ultimately a question of which works best for you. Until you understand the differences between an LLC and a sole proprietorship, you’ll never be able to honestly assess your specific situation and make a reasonable business model choice that will pay off later. Unlike LLCs, sole proprietorships offer you no liability protection – thus, if your company is sued, you could be held personally responsible for the damages incurred. Sole proprietorships and cheaper and easier to form, however, and many be preferable for entrepreneurs who don’t want to enlist the help of other workers as they carve out their commercial empire.
One of the greatest differences between an LLC and sole proprietorship is that sole proprietors don’t actually file separate business taxes. Rather, you report your net income or losses from your business on your own personal income tax. Given that it cost absolutely nothing to start a sole proprietorship, and given that it’s quite easy to manage as you’re the only person involved, it’s very popular with beginner entrepreneurs who want to immediately foray into a competitive marketplace.
For those with bigger commercial ambitions, however, and for anyone who wants to shield their personal assets from harm’s way, LLCs will likely be the preferable option. The easiest American LLCs, such as cosmetics firms supplying Juvederm, are almost as quick to launch as sole proprietorships, though they will entail more money and – as time goes on and your business grows – more work as well. LLCs are generally favored by those who have their eyes on future expansion, as sole proprietorships can become quite profitable but generally can’t expand too quickly given that they’re literally one-person operations.
Learn how LLCs protect your assets
Anyone considering an LLC versus a sole proprietorship should ask themselves if they’re familiar with how LLCs protect the personal assets of people running businesses. If not, don’t be ashamed – instead, hit the books and start studying, as this knowledge could be incredibly useful to you in the near-future. Limited Liability Companies, as the name implies, inherently limit the degree to which you can be held liable as an individual when something goes wrong. Thus, any customer suing your business would struggle to gain access to your personal bank account when seeking damages, though they could theoretically get your business’ assets if you lose the case.
Knowing how to go about protecting your assets as an LLC owner is essential if you want to make the most of this opportunity. You should also know, however, that LLCs are slightly more expensive and time-consuming to make, as they entail doing additional paperwork and filing articles of incorporation with your local state officials. Every state has different business model regulations, so survey your local area to get a handle on what you’ll need before dedicating too much money to your business if you want to avoid getting burned by a lack of foresight.
While LLCs do take more paperwork than sole proprietorships, you can’t totally escape legal obligations by running things yourself. You’ll want to make a claim to a business name, for instance, if you ever want your sole proprietorship to take off with customers. You should also be aware that you lack any real legal protections if you get sued, so watch your back as you set to work.
If you do opt for a sole proprietorship, you’ll need to manage your DBA, or “doing business as.” This is effectively how you make a legal claim to a certain business name, as without a formal name that you’re registered as “doing business as,” it will be hard for customers and investors alike to find you. Familiarize yourself with DBA filing if you want to become a sole proprietor, and you’ll soon be set for success. As time goes on, you’ll realize that LLCs and sole proprietorships offer different things to different entrepreneurs, and that making the right business model choice can make all the difference in the world when it comes to future profitability.