In the state of Florida, if you are a single owner of a business then you are considered a sole-proprietor. Some sole-proprietors choose to form an LLC. There are many reasons behind this, but one of the main reasons is the liability protection that is afforded because of it.
What is an LLC?
Limited liability companies are business structures in the United States that are able to enter into contracts, elect taxation, and be sued by other entities. Choosing how you want to incorporate your business is extremely important.
Although LLCs have many different advantages, before forming an LLC you will need to understand the difference between an LLC and a sole proprietorship completely. In any case, an LLC can be taxed as a sole proprietorship or a corporation, but they are not the same thing.
Advantages of an LLC
There are many advantages when it comes to forming an LLC other than liability protection.
- Taxes: Although there are formation costs associated with an LLC, the amount you will save on with taxes will more than cover these formation costs.
- Privacy: When formed anonymously by way of a registered agent, you will be given complete privacy protection for your personal affairs
- Professional appearance: Forming an LLC can seem more professional than a sole proprietorship because it will be formed with “LLC” or another variation in the name. This can aid in getting loans, or used to obtain higher ranking clients.
- Liability protection: Protects you if your business is sued. Your personal assets cannot be seized and taken to pay for business debts.
- Tax flexibility: As an LLC you elect how you wish to be taxed, whether that is as a sole-proprietor or corporation.
What is a Sole Proprietorship?
Sole proprietorships are essentially just a single person doing business. Sole proprietors are often referred to as a sole trader or a proprietorship. As an unincorporated business, a sole proprietor will be responsible for all the debts inquired by a business. You will also only need to pay personal income tax on any profits earned from the business.
Advantages of Sole Proprietorship
There are many advantages of being a sole proprietor, but also a few disadvantages.
- Simple to form.
- Only requirements are to pay taxes and operate.
- Potential to pay more in taxes because everything is considered income.
- Not required to pay any specific business taxes or unemployment taxes.
- Unlimited liability which means your personal assets can be attacked if you are sued.
- Looks unprofessional and can be difficult to raise capital.
LLC vs Sole-Proprietorship - What’s the Difference?
Although there are similarities between an LLC and a sole-proprietorship, there are a few key differences between the two.
Typically sole proprietors are often single people that own a small business. As long as you have no employees, you may not need to form an LLC. The start-up costs are essentially nothing, which can be good when you are starting out. Forming an LLC requires various regulations, forms, and fees to be paid.
LLCs are somewhat of a hybrid between either a sole-proprietor and a corporation. LLCs provide liability protection from that of a corporation with the tax advantages of a sole proprietor. Overall, LLCs protect you from risk.
Funding is an important part of any business. Whether you are looking for a business loan or looking to raise capital from investors, having your business set up as an LLC (a separate entity) can help you to obtain a loan much easier. You might not even be approved by a lender for a loan if you are a sole proprietor.
LLC & Sole Proprietorship Taxation
Owning and operating a business as a sole proprietor is no different than making an income and being taxed as a self-employed individual. Any income you make as a sole-proprietor will be taxed as personal income. Filing taxes is simple as a sole proprietorship. All you will be required to pay is a low rate of 15.3% on your personal tax return, regardless of the state you live in.
For LLCs, there are various choices when it comes to taxation. As an LLC you can choose to be taxed as a sole proprietor, but also as a corporation. This can provide substantial tax savings based on what you choose.
Should You Start an LLC or Sole Proprietorship
Those who have formed an LLC typically feel that an LLC can do no wrong. Despite this, there are some downsides to forming an LLC. If you will not directly benefit from being a single-member LLC then there is no purpose in paying the extra fees to form one.
In some states, single-member LLCs are not looked at in the same light as a multi-member LLC. In this case, you might consider staying as a sole proprietor. It is important to note that if you own assets, being a sole proprietor can be dangerous. To protect your assets, and your privacy, forming an LLC is often the best choice.
If you are unsure whether an LLC or sole proprietorship is right for you, we can help. Contact us online to schedule a consultation today!