Sole Proprietor vs. Single-member LLC (Main Differences, Pros & Cons)

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The main distinction between a sole proprietorship and a single-member LLC is that in a sole proprietorship, the owner and the sole proprietorship are one and the same, whereas, in an LLC, there is a distinct divide between the owner and the business entity when it comes to legal and tax matters. A single-member LLC is essentially the same as an LLC except for the fact that it only has one member.

Many small businesses end up being a sole proprietorship because they don’t register with the state, but if you do register with the state, then a separation between the SMLLC and its owner forms, which offers protection from the liability of the company. The SMLCC can then be taxed as a corporation.  

Choosing Your Business Entity (SMLLC or Sole Proprietor?)

A sole proprietorship and a single member LLC are both popular business structures. Before starting a business, it is important to work out what type of business entity will be best suited for you and your needs. This can be achieved by looking at the pros and cons of each, and understanding the main differences. One of the best ways to make your decision is to look at the differences from multiple angles, such as the personal liability, business taxes, ownership, and control of the business to name a few.


What is A Single Member LLC?

An LLC is one of the most popular types of small business across all states. A single-member LLC is an LLC that is run by, as the name suggests, a single owner. It is a business entity that is registered to the state of formation. Although it is only run by one owner, it has all the same advantages and disadvantages as a multi-member LLC.


Main Advantages and Disadvantages Between SMLLC and Sole Proprietorship

Pros & Cons of Sole Proprietorship

Pros

  • It is one of the easiest business types to set up and run, as there is no need for formal agreements and there are little to no ongoing compliance matters.
  • It is also one of the least costly business entities, as there are no filing fees to consider when setting up the business.
  • It is a good option for those that want to be their own boss. The owners are in 100% control and ownership of the business.
  • It is a good option for those that have a low risk business and just want to see how a business idea goes before using time and money to register it as a separate business entity.
  • Once the business is no more, it is very easy to dissolve a sole proprietorship. You simply just have to cancel all licenses and registrations that are associated with the business, then, as soon as you stop conducting business, you no longer have a sole proprietorship.
  • It is one of the easiest business types to file tax forms for.

Cons

  • It tends to be quite expensive to insure a sole proprietorship.
  • A sole proprietorship does not have any access to venture capital. Banks are very often not willing to lend money to a sole proprietorship, so raising money can be difficult. As sole proprietorships are unable to sell stock, this can be even more tricky.
  • They are limited in terms of how long they conduct business for. For example, if something happens to the business owner, then the business is likely to have to dissolve.
  • You are very exposed to liability as the business owner. If there are any debts or obligations of the business, then the owner is personally responsible. So, for example, if the business can’t cover its own debts, then personal assets can be seized, as well as funds from personal accounts.
  • Not operating under a trade name, you will have a lower amount of market credibility. To get around this, you would have to create a ‘Doing Business As’ name, which will require fees for establishment and ongoing fees.

Pros & Cons of Single-member LLC

Pros

  • An SMLLC does not have to pay any federal business tax, and in most states, there is no business tax either.
  • By having an LLC, the individual owner is protected from personal liability and debts that relate to the business.
  • There is a solid choice for a business that is medium to higher risk, or for those that have assets that they want to protect. This means that the owner’s personal belongings, such as a house or savings, are safe if the business has debts to pay.
  • An LLC may have more credibility over a sole proprietorship, although this is not necessarily true in all cases.
  • They offer a lot of flexibility in terms of how the business it#s run.
  • It is much easier to generate equity and debt finances as the business is a separate entity, especially if you have an established business credit score.

Cons

  • Although there are some advantages to an LLC being less formal, it also has its disadvantages. It can sometimes be harder to raise capital, obtain credit and work out the value of the LLC.
  • There are lots of ongoing requirements that come with running an LLC which can be confusing and time consuming, and in some cases will cost the business money, such as filing an annual report.
  • Forming an LLC will be much more costly than a sole proprietorship, as there are a number of state formation fees to consider, and in some states, these fees can be quite high.
  • All LLCs must have a registered agent, which again, depending on the route you choose, can be expensive.
  • There are regulations that an LLC must follow, such as limitations on the business name, or having to publish a notice of formation.

Main Similarities Between SMLLC and Sole Proprietorship

Although they are both very different business types, there are still some similarities between the two.

Both business types are required to report any income and expenses on Schedule C of Form 1040. The net income from both will be taxable. It is very important that the business owner maintain records of any income and expenses, so that you can take any deductions that you are entitled to. These can include expenses such as mileage for business travel, meals while travelling for business, home office expenses, and health insurance to name a few.

In both cases, if the business has any employees then a tax payer identification number needs to be acquired, and the business owner has to withhold and pay payroll taxes. You must also be aware of all business obligations regardless of which business type you choose, which include all licenses and permits.


Setting Up the Business

Sole proprietorship

If an entrepreneur sets up a business that contains their first and last names somewhere in the business name, then they don’t have to register their name with the state, which makes the setup process very easy. One of the only requirements are that in some states, a business owner is required to run an advert in a newspaper to let the public know who is conducting the business.

Single Member LLC

Setting up an LLC is a lot more time-consuming, as you have to register with the state in which you are conducting business. A document called the Articles of Organization is required, which are not too hard to fill out but, if you don’t want to do it yourself, you can hire a third party to file the Articles of Organization for you. At this point, the business name also needs to be registered.

Both

Both types of business entities will be required to obtain an EIN, which is needed to open a business bank account, hire employees and various other business related tasks. Depending on the state, both will also have to apply for any necessary licenses and permits, and if the business has any employees, they will have to withhold the payroll taxes from the employees’ salaries.


Personal Liability

Sole Proprietorship

There is no legal separation between the business owner and the company in a sole proprietorship, which many people try to avoid. In the eyes of the state, they are one legal entity, which means that the business owner is completely responsible for all the legal obligations and debts of the business. Therefore, if the business runs into some trouble and can’t pay the bills, or if the business gets sued, then the individual business owner will be responsible for this. If it comes down to it, it may even mean that the business owners’ personal assets might be taken as restitution.

Single-member LLC

An LLC is its own business entity, which means it is legally detached from the business owner, removing that element of personal liability. If any legal action is taken against the business, or it has any debt, then the business owner is not held personally responsible, unless of course, they have engaged in wrongful business activities.


Ongoing Business Compliance

Sole Proprietor

If you want an easy life after setting up a business, then a sole proprietorship is the way to go. In fact, it is one of the easiest business types when it comes to an administration standpoint. There are basically no corporate compliance formalities that you need to abide by, as the state does not recognize it as a separate legal entity.

Single-member LLC

There is a bit more ongoing business compliance when it comes to a Single Member LLC. The requirements depend on where the LLC is based, but there is still not too much compliance to worry about. In general though, the basic requirements may include filing an annual report with the state, although some states may only require this every 2 years, paying business taxes and recording the major changes that take place in your LLC to the state, which is achieved by filing an Articles of Amendment.


Income taxes

Sole Proprietorship

The business owner and the business itself are one and the same in a sole proprietorship, so that means that they are also the same tax paying entity. A sole proprietorship uses a method called pass-through taxation, which means that the income tax obligations of the business is conducted through the owner’s personal tax return.

Single-member LLC

If an LLC meets all eligibility requirements, they can choose to either be taxed as a C Corporation or an S Corporation. With C tax treatment, the business income will get taxed at the corporate tax rate and the business can file a separate tax return. With the S Corp option, then income tax is reported on the business owner’s personal income tax return. Most LLCs will lean towards the C Corp option.


So Is SMLLC or Sole Proprietorship Righ For You?

There is a lot to consider when it comes to what sort of business type is right for you and your needs. You have to weigh up the advantages and disadvantages of both. In general, it will cost you a bit more to set up and run an LLC when compared to a sole proprietorship, but in some cases, the slightly higher price tag might be worth it.

Learn as much as possible about each type of entity before making your decision, and it even may be worth seeking professional guidance from either a tax advisor or an attorney.

In general, a sole proprietorship is usually a good option for those that want to run a low-risk business, and are just starting out in the industry. It is a good way to first test out a business idea before looking into other, more formal entity formation options. A single-member LLC on the other hand is often chosen but that that has a little bit more of a high-risk business, as the owner’s assets will be protected.


Best Legal Help for LLC Creation

As forming an LLC is a little more complicated than a sole proprietorship, some people may not be comfortable with forming it by themselves. There are lots of companies out there that can help. Here are my favorite and best-rated 2 companies that can form a Single-member LLC for you, completely hassle-free:

#1: ZenBusiness

Zenbusiness is one of the most popular choices when it comes to LLC formation, and this can be pinned down to a number of reasons. They are one of the most affordable options available, with the ability to form an LLC for under $50, which is a lot cheaper than many of its competitors. For this cheaper price tag, businesses still get everything they need and more to successfully form an LLC, as well as a registered agent for a whole year included in the price. The customer experience is very good, with a helpful customer service team and very few upsells. If you look online, there are literally hundreds of positive reviews available to read about Zenbusiness, which helps to give individuals peace of mind. In addition to LLC formation, customers also have the option to go with a number of premium packages which come with other helpful extras such as business websites, business email address, and other ongoing business maintenance issues. If interested, you can also check out our full ZenBusiness review here.

$49

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Rating: 4.8/5
Review count: 4160+

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Form an LLC today with ZenBusiness for only $49. They Have 98% customer satisfaction rating and over 4000+ verified reviews.


#2: IncAuthority

Another popular choice is IncAuthority, which is actually even cheaper than Zenbusiness as they have a ‘free’ plan. All you have to pay is the mandatory secretary of state fees. The company makes its money if the business owner chooses to subscribe to any additional services. In the free plan, you’ll get a business name search, document preparation and filings, free registered agent services for a year, and a number of other services. The company has helped to form literally thousands of businesses since its beginnings, and has some great customer feedback, with thousands of reviews available online, the majority of which are very positive. If you did want to go with one of the paid plans, you should be prepared to pay quite a hefty fee.

If you want to know more — here’s a full review of IncAuthority as well.

$0+State Fees

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Rating: 4.8/5
Review count: 4500+

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Form an LLC today with IncAuthority starting at $0+state fees. They’re one of best-known services with lots of great customer experience.


FAQs

Where should I form an LLC?

There are lots of things to consider when deciding where to form an LLC, including costs and where you want to conduct business. Most people prefer to file their LLC where they are doing their business, while other people choose a different state, as different states come with different advantages and costs.

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About the Author
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Founder & author

Ian Broderick is an avid author and owner of LLCGuys.com. He's been involved with the LLC formation field for over 4 years. On top of that, he has worked in several well-known LLC formation service providers. Now he decided to share his knowledge and advice with everybody. Since there are a lot of questions and concerns surrounding this field - his aim is to make LLCGuys a top-notch information provider in regards to LLC creation, service reviews and etc..

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