Thinking about starting a business? One of the main questions you will need to tackle first is whether to make your business an LLC or a sole proprietorship. With 73% of all businesses in the U.S. being either sole proprietorships or LLCs, it is crucial to understand the difference between the two, and which one is better for you. The main difference is the degree of personal liability protection each one has. A Limited Liability Company (LLC) will give you protection over personal liability claims, and a proprietorship will not. Nonetheless, this article will walk through the three main reasons why an LLC is a better option than a sole proprietorship.
1. Separate your business and personal finances
When you form an LLC, you are creating a legal business entity. The LLC has a separate legal identity distinct from your personal identity. Offering a separation when it comes to the protection of your personal assets from your business will come in handy in the off chance an upset customer tries to sue you for all you have. In this scenario, if you have an LLC, then your personal assets would be protected from the lawsuit. The LLC will give you a “corporate shield” covering your personal finances and identity, whereas in a sole proprietorship, the shield would be nonexistent, and your personal finances would be up for grabs in a lawsuit.
Even though a sole proprietorship seems tempting as it is simple to form, it offers the lowest legal protection for your finances and personal assets. Fortunately, after forming your LLC, you can set up your Employer ID Number (EIN) to set up a bank account for your business. Once again, this is just another step when creating an LLC that separates personal accounts from business ones.
2. Save time and money on your taxes
Whether you have a sole proprietorship or LLC, you will eventually need to pay taxes on all of your business income. With an LLC, you will be able to open a separate business bank account with its own credit card, line of credit, and other financial tools. Talk about staying organized! With an entirely distinct financial account from your personal finances, you will have a much easier time keeping track of tax-deductible business expenses.
Another key concept with taxation of an LLC is a pass-through. With an LLC, you may not have to pay business taxes on it first. The business earnings can be passed straight through to the owners without having to pay corporate federal income taxes first. You can also choose the way your LLC will be taxed – sole proprietor, partnership, S corporation, or C corporation. Furthermore, you are offered more flexibility in how your business income will be taxed at the federal level with an LLC rather than a sole proprietorship.
3. Bring on shareholders or partners
Finally, an LLC will enable you to further explore opportunities to expand your business. Wanting to expand through bringing on a business partner or investors? An LLC will give you the legal ability to do so, whereas in a sole proprietorship, you are in the business for yourself and by yourself.
Conclusion
The risk of running any business is high, so help mitigate the risk by setting up an LLC. The benefits to the security of an LLC make the ongoing filings and fees to stay in compliance worth it in the end.
Dye Culik PC has worked with business owners, startups, franchisees, investors, other entrepreneurs of every type. If you have a question about your business, we are here to help.