Sole Proprietorship vs LLC
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?
Heres a quick breakdown to help you decide on the business structure for your online business.
For home-based businesses, online businesses or other small businesses, a sole proprietorship is often the best option because it is the least complicated and gives you complete control over your business. You can be held personally liable for the debts and obligations of the business. For tax purposes, the profits and losses of the business flow through to the owner's tax return and reported as earned income. A single owner of an unincorporated business essentially operates the business as an extension of herself.
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.
It can also be hard to raise money because you can't sell stock, and banks are hesitant to lend to sole proprietorships.
- 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. So, if someone gets sick from one of your vegan goodies, 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)
Forming an LLC will help to protect your personal liabilities (i.e. house, vehicle) from lawsuits and prevents them from being at risk in case your LLC faces bankruptcy. Members 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 (not your personal assets).
- The negative: An LLC is a statutory entity, which means that you’ll need to file a certificate of formation (this document has different names in different states) and pay filing fees to set up the entity.
Can I convert from a sole proprietorship to an LLC?
If you already have a sole proprietorship, you can convert to an LLC anytime and the tax structure doesn't change. 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.