Before you set up your own business, the first thing to do is to choose a business structure for the future organization. This is exactly what can start your exciting journey into the entrepreneurship industry. If you are a single business owner, then the selection is narrower. So, there are two most popular ways that will work for you, they are:
- Sole proprietorship;
- Single-member LLC (Limited Liability Company).
However, how to make the right choice and not make a mistake?
To figure out which structure is better for your business formation, this article will answer the questions such as: what each option stands for and what their advantages and disadvantages are, what the difference between them is, if any, and whether you can trust LLC formation services, such as MyCompanyWorks and Rocket Lawyer, to open one of these business structures without drowning in a sea of paperwork.
If this topic is relevant to you, let’s get started!
Single-Member LLC vs Sole Proprietorship: Comparison
What Is a Single-Member LLC Formation?
If we talk about the most popular types of businesses in America for small businesses, a single-member LLC, or an SMLLC for short, refers to one of them. As the name implies, a single-member LLC has one owner, unlike a regular LLC run by more than one owner, more commonly known as a member.
This business structure offers the entrepreneurs not only the ease and flexibility of conducting business on their own but personal financial protection as well. Therefore, if you are a single owner of your enterprise, then you shouldn’t act only as a sole proprietor. You can minimize your potential liability for the company and, at the same time, increase your tax benefits just by forming an SMLLC.
Since we have touched on some of the advantages of a single-member LLC incorporation, let’s discuss them in more detail, and see what the disadvantages may occur with such a business structure.
Advantages and Disadvantages of a Single-Member LLC
Speaking about the positive things, we can mention the following advantages of operating a single-member LLC, which are as follows:
- The well-known “corporate veil” will protect your personal assets from the company’s liabilities;
- If we talk about taxes, then there is also a pro. A single-member LLC enjoys flexible taxation. It means that you will be able to choose the type of taxation either as a sole proprietorship or as a corporation. Nevertheless, we recommend that you consult with an experienced accountant before making such a decision to understand what would be more beneficial for your venture;
- If you commence a single-member LLC, you may increase the credibility of your organization in the eyes of potential investors as well as customers. Many businessmen prefer to deal with a particular business rather than an individual.
Undoubtedly, an SMLLC offers many advantages to the entrepreneur. However, it is vital to realize that there are always two sides of the coin. Even here, there are also some pitfalls. The disadvantages can be considered as follows:
- Although an LLC protects your personal property, it does not save you from liability, when there is a lawsuit against one of your employees. It is you who will be responsible for all wrongdoing, whether it is deliberate or negligent;
- Since you are a single owner of your LLC company, you will be in charge of any of your personal guarantees as well as promises you make, for example, to a financial agency or a creditor. This also applies to any contracts you sign on your own behalf and not on behalf of your enterprise.
What Does a Sole Proprietorship Mean?
A sole proprietorship is a non-corporate business, which has only one owner, who, unlike a single-member LLC, takes responsibility for the company’s assets and liabilities (and any debts), as they are not kept separate from the personal ones. It follows that profits and losses are reported on the individual’s tax return.
In addition, there are many sole proprietors doing their businesses under their own names, since they don’t need to create a separate commercial organization, as well as a trademark.
Sole proprietorship fits those who do not deal with large profits and also provide services to a small client base.
There is the only requirement for sole proprietors, it refers to compliance with the legislation (local, federal, and state), which also makes them the easiest businesses to launch.
Pros and Cons of Sole Proprietorships
As you have already understood, a sole proprietorship also has its strengths and weaknesses, which we are now going to talk about.
Let’s start with the pros:
- Being an owner, you control all the processes of your business, including financial issues;
- Closing your business (in case you no longer want to conduct it) can be done very quickly, without any hassle;
- If you decide to set up a sole proprietorship, then you don’t have to worry about the fact that you’ll have to spend a lot of money. It requires minimal financing.
However, if we talk about the downside, the cons are as follows:
- One of the significant disadvantages of sole proprietorship involves personal liability for any debts and obligations of your business;
- Sole proprietors pay taxes on their profits, as well as FICA taxes (Medicaid and Social Security). Hence, when your business becomes more profitable, taxes will be higher;
- All company activities are conducted under your personal name (if the state where you operate does not allow you to register a DBA).
Can I Hire Online LLC Services To Start a Single-Member LLC or Sole Proprietorship?
Of course you can! In fact, it will be a very good decision for you, because top LLC companies will do their job to the fullest.
When you have already decided to create a sole proprietorship or a single-member LLC, the help of specialists will come in handy as never before. There are many online LLC creation services, which know how to make your business creation process faster and more efficient.
Each LLC website offers its own set of available features in addition to business registration. You will also have access to business services such as:
- Registered agent services;
- LLC formation documents;
- Employer Identification Number (EIN);
- Operating Agreements;
- Business name check, etc.
What Incorporation Services To Choose?
By hiring one of the incorporation companies, you don’t have to worry about the legal aspects of a single-member LLC or sole proprietorship launching. Any good online registration service will keep you informed in the future of any legal requirements you need to take care of.
If we talk about the most famous websites for LLC, the first service that comes to mind is LegalZoom, which has already served about 4 million clients.
First of all, you have to take into account your business, its specifics, type, and needs. Each professional service is unique and has its own unique features. For example, IncFile offers you the cheapest LLC formation, since this company’s services start at $0.
To Sum Up
You finally have an idea of what a single-member LLC and a sole proprietorship are. Now you know it’s not the same thing? Great!
If you, as an entrepreneur, face challenges, then sole proprietorship will be a more cost-effective and simple option for you.
However, if you have a fast-growing business that requires financing, starting a single-member LLC will bring its own advantages.
Still, when considering alternatives as well as affordable company formation services, think about your business goals to make the best choice for you and your business venture.