I get these 2 questions a lot!
- Do I set up my business as a sole proprietorship or LLC?
- Can I start as a sole proprietor and change to an LLC later?
So we put together a little breakdown of each to help you choose which is best for your business starting out.
For individuals operating a home-based business, online business or other small business, a sole proprietorship is often the best option because it is easy and inexpensive compared to an LLC.
For tax purposes, the profits and losses of the business flow through to the owner's personal tax return and reported as earned income. In additon to earned income, you are able to write off your expenses from the business such as supplies, computer service, monthly fees and more.
Although the startup is appealing to new business owners, it is important to note sole proprietors can be held personally liable for the debts and obligations of the business. That means if something goes bad or your business gets sued, your personal assets can be called into question if you aren't able to pay accordingly if found liable.
Sole proprietors still can use a name different from their own in order to run a business with a DBA (doing business as). However, the DBA cannot contain terms such as a corporation, incorporated, or LLC unless the business legally operates as such.
- The positive: There is no easier way to launch a business than as a sole proprietor -- basically, you just start working.
- The negative: A sole proprietor has zero liability protection. For example, if someone breaks out from a product your selling and all of the materials weren't listed, they can sue you personally. If they win, they will have access to all of your assets: your money, home and cars, among other assets.
LLC (Limited Liability Company)
LLCs are a popular choice because they allow you the ease of still running your business as a sole propreitor, while also protecting your personal assets (i.e. house, vehicle) from lawsuits. In addition, if your business files for bankruptcy, your personal assets can not be added - only business assets/liabilities. Members (that's you) of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security (unlike a sole proprietor). LLCs can be a good choice for medium or higher-risk business owners that have a significant amount of assets that they want to be protected.
- The positive: The biggest benefit of the LLC over the sole proprietorship is that the LLC shelters you from liability. A potential plaintiff would have to sue the LLC -- and if he or she wins, the person would generally be limited to the assets of the LLC only (not your personal assets).
- The negative: The upfront cost of filing for an LLC can be in the hundreds of dollars, which may be expensive for new business owners.
Can I convert from a sole proprietorship to an LLC later?
If you already have a sole proprietorship established, you can convert to an LLC anytime. In pretty much all states, you will have to transfer your federal and state employer identification numbers (EIN), sales tax permit, business license and any professional licenses to the name of your new LLC.
Keep in mind, that as you grow, you are always able to make changes that are better for your business.
We recommend you start off as a sole proprietor, as most people do, and later convert to an LLC.