LLCs prevent double taxation of owners. Setting up an LLC shields assets from debts and lawsuits. A limited liability company protects personal assets. Members manage LLCs jointly. However, LLCs can bring disputes between members. If the business has issues, your personal assets are safe. Another LLC downside is taxation complexity. LLCs choose tax status but may face double taxation.
Sole proprietors and LLCs pay taxes in similar ways. Their tax rates match individual taxpayers. They pay income and payroll taxes on business earnings. Sole proprietorships file personal tax returns yearly. LLCs may choose pass-through taxation or corporate returns. With pass-through taxation, business income passes to the owner’s personal return. It becomes taxable income (advantageous since individual rates are lower than corporate).
Forming a sole proprietorship is simpler than an LLC. A sole proprietorship just needs an available name and registration fee. Raising capital can be an issue for a sole trader. As a sole trader, all business debts and obligations are personal. If your business fails you could lose personal assets like your home and savings.
Liability Protection and Business Structure
Sole proprietorships and LLCs differ in liability protection. Sole proprietors have no distinction between personal and business assets, expenses, and debts. But LLCs have legal identities separate from owners. Most importantly, LLCs separate business and personal assets.
The Success and Perception of Sole Proprietorships
The success of the business relies on the abilities of the sole trader. Sole traders tend to work long hours. Setting up as a sole trader has rewards but the advantages and disadvantages need discussing to decide if it is the right business structure.
A sole trader may lack the prestige of a limited company. A sole trader seems higher risk. This perception comes from a sole trader’s unregistered status. Established businesses trade as limited companies. In dealings, people trust ‘big business’ due to resources and infrastructure.