Which Is Better LLC or Sole Proprietorship?

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Sole Proprietorship vs. LLC

  • Sole Proprietorship Overview
  • Starting a Sole Proprietorship
  1. Decide on a name
  2. Get a "Doing Business As" name
  3. Get licenses and permits
  4. Set up accounting
  5. File taxes

  • As a sole proprietor, your "pay" is the profit. You can hire employees. But you can’t deduct your salary.

  • It costs $10-100 to register a DBA name. Forming an LLC costs $100-800.

LLC Tax Considerations

  • Do LLCs Pay More Taxes Than Sole Proprietorships?

A limited liability company (LLC) protects personal assets. If the business has issues, your personal assets are safe. LLCs prevent double taxation of owners. Setting up an LLC shields assets from debts and lawsuits. However, LLCs can bring disputes between members. Members manage LLCs jointly. Differing ideas on operations or profit distribution cause conflict. Another LLC downside is taxation complexity. LLCs choose tax status but may face double taxation. Profits can be taxed at corporate and personal levels. Members also owe self-employment tax.

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). LLCs may also file as S or C corporations.

Forming a sole proprietorship is simpler than an LLC. A sole proprietorship just needs an available name and registration fee. Forming an LLC involves more steps like having agreements between partners and appointing a registered agent.

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. Owners have no legal business obligations. Most importantly, LLCs separate business and personal assets.

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