Why Serious Business Owners Form an Llc Rather Than a Sole Proprietorship

Why Serious Business Owners Form an Llc Rather Than a Sole Proprietorship LLC vs sole proprietor: which business structure is better for the small, but serious, business owner?

A sole proprietorship is an informal business structure, mainly for low risk, low profit ventures.

Sole proprietor assumes all risk and reward of the business. LLCs, however, are designed to provide owners with limited liability and the protection of personal assets. LLCs are regarded as separate legal entities in relation to their owners, which makes LLCs better suited for ventures that have high levels of associated risk, and also for business owners who envision rapid growth and increasing profits.

According to academic research on the different business structures, understanding the advantages and disadvantages of different business entities will allow business owners to better decide which business structure is best suited for their particular business venture. For serious business owners, LLCs are definitely a better business structure than a sole proprietorship, and to prove it, we’ll go through the advantages and disadvantages of each.

LLCs vs Sole Proprietorships Starting with sole proprietorships, the only advantage of sole proprietorships is that a sole proprietorship does not take much money and energy to form, which does seem like a very lucrative advantage. However, as the disadvantages go, sole proprietorship do not offer owners limited liability protections, because the sole proprietorship and the owner are seen as one legal entity, which means personal assets are at risk of seizure. Sole proprietorships have no tax benefits, so the more profitable a business becomes the more expensive taxes will be. Sole proprietorships have less credibility, branding opportunities, and limited growth potential before it becomes too profitable and the need arises to formally incorporate a business. Sole

proprietorships are thus best for businesses with a low chance of liability or financial loss, in other words low-risk, low-profit businesses with small customer bases.

LLCs, on the other hand, are much better suited for businesses with a large customer base, businesses with the potential for rapid growth and increased profits which also increases the risk of liability or loss, and businesses that want to take advantage of the tax benefits associated with LLCs. As mentioned above, LLCs and their owners are regarded as separate legal entities and offer owners limited liability protections, this means that an owner’s personal assets and belongings are safe from seizure in the event that a business is sued or suffers a financial loss.

That’s the first benefit, the second is that LLCs are generally more credible and have more customer trust than sole proprietorships do, which makes applying for loans and retaining customers all the most easier. The last advantage of LLCs is the tax benefits. LLCs have the option to customize the tax structure according to the unique circumstances of the business, LLCs avoid double taxation and have the option of being taxed as a corporation.

To sum it all up, sole proprietorships and LLCs are both business structures that are subject to pass-through taxation, where a business’ profits are only taxed once at a personal level (instead of a corporate level). Sole proprietorships are less expensive to form compared to the formation costs and processes of LLCs, however sole proprietorships with a Doing Business As (DBA) Name will result in similar prices. And lastly, unlike a sole proprietorship, an LLC offers limited liability protection, and is better suited for business focused on branding and marketing. For all these reasons and more, LLCs are a much better choice of business structure for serious business owners, than a sole proprietorship would ever be.

If you are looking for a more in-depth analysis of differences between an LLC and a sole proprietorship, and which is better suited to your type of business, visit TRUiC’s website where you can find clear cut answers to hard decisions, and even find steps to start forming a business today.