Before you decide on starting an LLC – is there another business entity that better serves your needs? Know the differences before you make that final decision. Different business entities have different reporting, accounting and maintenance requirements, as well as tax reporting procedures and other benefits.

What’s the Difference Between a Sole Proprietorship and an LLC?

A sole proprietorship is a business entity that has no legal separation from its owner. All of its debts are that of its owner. Reminiscent to its name, it truly is a “sole” business with no partners or stakeholders of any kind. Accounting procedures are simple, as all income taxes are paid as a combination of the business’ assets and the business owner’s assets.

A major benefit and top consideration most people have for starting their own LLC is the level of protection it provides, shielding their personal assets and property from many actions taken by the company. For example, if your LLC borrows money from the bank, then the LLC directly is responsible for the loan – not you, the owner. Say that the loan borrowed by the LLC defaults: the bank would have to go after the LLC’s assets or property…not yours! This is how an LLC differs from a sole proprietor: sole proprietors and their businesses are considered one in the same; therefore, all liabilities of the sole proprietor’s business are that of the sole proprietor themselves. Creditors have the ability to go after each company owner’s assets and property (their individual bank accounts, houses, and other properties) to make up for a loss. In short, an LLC is a major step you can take to minimize your personal risk. It will shield you, the business owner, from most business debts, liabilities and lawsuits.

What’s the Difference Between a Corporation and an LLC?

A corporation is a business entity that is owned by its shareholders combined. Much like LLCs, they are limited liability organizations that are considered separate entities in terms of legal and accounting issues. Corporations must share profits with their shareholders. As a part of their annual standing, corporations undergo rigorous record-keeping procedures that involve regularly recorded meeting minutes. Corporations typically identify themselves with the suffix “Ltd.” (private company limited by shares, where shares may not be offered to the public) “Inc.” (incorporation) or “PLC” (public limited company, permitted to offer shares to the public). In most situations, the abbreviation “Co.” may exclusively be used by corporations. Corporations are double-taxed on both a corporate and individual level. There are two kinds of corporations, “C” (no membership restrictions) and “S” (membership restricted to a maximum of 100 shareholders), both having separate taxation methods.

Both entities are similar in the sense that they provide liability protection, and involve regular maintenance. However, an LLC is easy to register and maintain for the individual person, albeit, may be slightly costlier to form than a corporation: an LLCs salaries and profits are subject to self-employment taxes (approximately 15.3%) where as a corporation is only subject to salary taxes. Corporations tend to enjoy better tax advantages and fringe benefit plans than LLCs, as they do not have to report medical and dental benefits, group insurance and related benefits as taxable income, where as an LLC does.

Where to Go Next: Register an LLC