No business can sustain and grow properly without a proper organisation structure, management controls, and tax structures. In the case of start-ups, the entrepreneur has to select a business structure, and the selection must complement his/her type of business.
Sole proprietorship and LLC are both such two business models.
Key Takeaways
- Sole proprietorships are simpler to set up and require less paperwork than LLCs but do not offer personal liability protection.
- LLCs provide limited liability protection, shielding the owner’s assets from business debts and lawsuits.
- Taxation differs between the two structures, with sole proprietorships being taxed as self-employment income, while LLCs can choose between various taxation methods.
Sole Proprietorship vs LLC
A sole proprietorship is a type of business structure owned by a single individual, who has full control over the business and personally liable for its debts. An LLC, or Limited Liability Company, is a separate legal entity that offers the owner limited liability protection, shielding personal assets from business debts and claims.
A sole proprietorship is a business with only one person in the owner’s place. This owner is responsible for taking all the legal and financial decisions and standing as the sole person responsible for all the transactions.
LLC stands for Limited Liability Company. This business structure can have one or even more than one owner.
Businesses with a high amount of capital can fully take advantage of this structure. With more than one owner, the control lies in everyone’s hands.
Comparison Table
| Parameters of Comparison | Sole Proprietorship | LLC |
|---|---|---|
| The number of owners | Here only one person is the owner. | Here one or many owners can be present. |
| Capital | This is suited for small startup capital. | This is suited for high startup capital. |
| Liability | All the members hold complete control. | Her members get liability protection. |
| Liability Protection | In a sole proprietorship, the owner does not enjoy any liability protection. | The complete control stays in the hands of the owner. |
| Control over business | Complete control is held by all the members. | The regulations here are simple, and the license is simple as well. |
| Taking decisions | Here making and taking decisions are easy. | Here decision making and taking snatch longer time. |
| Regulation | Here the regulations are complicated, and documentation is needed. | Here the regulations are complicated and documentation is needed. |
What is Sole Proprietorship?
A sole proprietorship is just what its name suggests. It is a business where only one person runs and operates a business. Here no concept of a business partner can be present.
This is the simplest form of business. Therefore, it is suitable for startups that run on small capital.
It gets categorized as an unincorporated business.
There are no apparent differences between you and your business in the case of a sole proprietorship. You are solely entitled to it and will get all the profits and debts.
Even when the employees commit a fault, you will be held responsible.
The taxation here is done based on the income of the sole proprietor. They must report the gain and loss but will not file as a corporation.
What is LLC?
An LLC or Limited Liability Company is a business with a corporate set-up. LLC offers legal and financial liability protection to all owners.
Therefore the personal accounts of all the owners are excluded from debt or legal judgments.
Identifying an LLC business is very easy as the company name will bear the phrase “limited liability company” at the end of it. All the members of the owning body will get liability protection from all the debts and obligations of the business.
This is the primary feature of this structure. So if the business faces loss, the debt can not dig into the owners’ personal assets.
The documentation of an LLC can not be as easy as the sole proprietorship. The most important documentation of LLC is called the articles of organization.
It should be filed with the state where it belongs; without this, the business’s existence will not be valid and legal. Any business decision is supposed to be taken by all the members, which might be time-consuming at times.
Main Differences Between Sole Proprietorship and LLC
- A sole proprietorship is, just as its name implies, owned by a single person solely, but LLC is a Limited Liability Company.
- In a sole proprietorship, only one person is the owner, but in the case of an LLC, one or more people can be owners.
- A sole proprietorship is for small startup capital, whereas LLC is ideal for startups with high capital.
- A sole proprietorship includes only one owner, so only the owner is liable for all the transactions. Still, the company is liable for all legal and financial transactions in the case of an LLC.
- In a sole proprietorship, full control lies in the hands of the owner, and on the contrary, the full control of an LLC is held by all the members.
- Any decision-making in a sole proprietorship happens easily as only one person is responsible for making the decisions, but that is not the case for LLC. all the members need to make and support a decision.
- http://www.cpestore.com/pdf_courses/TAX272207/TAX272207_toc.pdf
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2340544
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
