Hundreds of new businesses open in the United States every day. In fact, the year 2020 saw over 4.41 million new applications for opening businesses.
While you may want to jump onto the business bandwagon, you must understand the process well. You need to determine your management structure, figure out tax implications, and even select a business structure.
The selection of a business structure can be challenging as there are numerous options available. LLCs and sole proprietorships are two of the most prominent ones among a lot of small businesses.
But which one is right for you?
Let’s find out.
Tax is an important aspect that needs to be taken into consideration while choosing a corporate structure. Sole proprietorships offer pass-through taxation which means that the company’s income passes through to the owner. You need to then include it in your personal income tax return. Additionally, you need to pay self-employment taxes to the federal government as a sole proprietor.
What about LLCs?
LLCs, too, offer the pass-through taxation feature. However, you can also choose to have the LLC taxed as an S-Corporation, unlike sole proprietorships.
The formation process for LLCs and sole proprietorships is vastly different. In the case of LLCs, you need to file your Articles of Organization with the Secretary of State. Additionally, you need to create an LLC Operating Agreement that outlines the various responsibilities and roles of the owners (called members) of the LLC.
You also need to pay the state filing fee for the LLC and will also have to pay an annual filing fee. This fee could be anywhere between $50 and $500 based on your state.
On the other hand, the process of forming a sole proprietorship is simpler. You can run it in your name without any additional formalities. Alternatively, you can apply for DBA (Doing Business As) to operate your business under a fictitious name.
Sole proprietorships are owned and run by a single person. On the other hand, LLCs can be run by both single and multiple entities, which are called members.
These members don’t necessarily have to be individuals. They could be other LLCs and even foreign firms.
But there’s a caveat.
Banks and insurance companies can’t be members of an LLC.
Regardless of the type of company structure you choose, you need to ensure that you comply with all the filing requirements well. This is critical as it determines whether you’ll be able to successfully form and run your company, be it an LLC or a sole proprietorship.
To understand more about how you can start an LLC or sole proprietorship, you can check out this infographic designed by GovDocFiling.