Difference Between Sole Proprietorship and LLC

Without a proper organisation structure, management controls and tax structures, no business can sustain and grow properly. 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 both are such two business models.

Sole Proprietorship vs LLC

The main difference between a sole proprietorship and LLC is that a sole proprietorship has only one owner, but LLC can have more than one owner. The regulations of a sole proprietorship can be fixed using simple permits and licenses. On the other hand, LLC will need complex documentation and agreements.

Sole Proprietorship and LLC

A sole proprietorship is a business that has only one person in the place of the owner. This owner is responsible for taking all the legal and financial decisions and also standing as the solely liable person 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 take advantage of this structure fully. In the case of more than one owner, the control lies in everyone’s hands.

Comparison Table Between Sole Proprietorship and LLC

Parameters of ComparisonSole ProprietorshipLLC
The number of ownersHere 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 Only the owner is liable for all the transactions, legal as well as financial.The company is liable for all the transactions, legal as well as financial.
Liability ProtectionIn a sole proprietorship, the owner does not enjoy any liability protection.Her the members get liability protection.
Control over businessThe full control stays in the hands of the owner.Full control is held by all the members.
Taking decisions Here making and taking decisions are easy.Here decision making and taking snatch longer time.
Regulation The regulations here are simple and the license is simple as well.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 a 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 you will get all the profits as well as the debts.

Even when a fault is committed by the employees, you will be held responsible. 

The taxation here is done based on the income of the sole proprietor. He/she needs to report the income 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 the 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 in case the business faces loss, the debt can not dig into the personal assets of the owners. 

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, and without this, the existence of the business will not be valid and legal. Any decision regarding the business is supposed to get taken by all the members, which might be time-consuming at times.

Main Differences Between Sole Proprietorship and LLC

  1. A sole proprietorship is, just as its name implies, is owned by a single person solely, but LLC is a Limited Liability Company.
  2. In a sole proprietorship, only one person stands as the owner, but in the case of LLC, one or more people can be owners.
  3. A sole proprietorship is for small startup capital, whereas LLC is ideal for startups with high capital.
  4. A sole proprietorship includes only one owner, and as a result, only the owner is liable for all the transactions, but in the case of LLC, the company is liable for all the transactions, legal as well as financial.
  5. In a sole proprietorship, full control lies in the hands of the owner, and on the contrary, the full control of LLC is held by all the members.
  6. 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. in LLC, all the members need to take and support a decision.
Difference Between Sole Proprietorship and LLC

Conclusion

Essentially sole proprietorship and LLC are not very different business structures. Both come under the control of the government, so they are controlled and bound by laws.

Again, being businesses, both come with risks and uncertainties. These risks may include tax factors, changes in sales, new trends, and competitors will also be a threat to the fixed characteristics of the business.

The purpose of both the structures is the same; both aim to satisfy the customers so that they come back again and the business grows organically. The perfect structure for your business will get decided based on the nature of your business.

If you are planning a business on a large financial scale, then LLC is ideal, but if the capital of the startup is small, then sole proprietorship is well fitted.

References

  1. http://www.cpestore.com/pdf_courses/TAX272207/TAX272207_toc.pdf
  2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2340544
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