Did you know that over 440,000 business applications were filed in March 2021 in the US?
Post the pandemic, many people who lost their jobs are rushing to start their own business. Others want to become entrepreneurs to meet the changing needs of the consumers.
If you are also planning to start your own business, the first step is to decide the type of business structure you want to choose. It is a crucial decision as it can impact your operational arrangements, taxation structure as well as ownership structure.
Among all the entity types, Sole Proprietorship and Limited Liability Corporation (LLC) are the most common ones. In this post, we’ll take a closer look at how they differ.
Legal Formalities
In a Sole Proprietorship, you can run your business under your own name or choose a fictitious name. In case you choose the latter, you’ll need to file for a DBA (Doing Business As) in the state where you are starting a business. You’ll have to pay some fees for this legal formality.
To establish an LLC, you’ll have to file Articles of Organization with the Secretary of State. Additionally, you’ll have to create an operating agreement that can define the responsibilities and roles of each member and manager of an LLC.
Along with the state filing fees, you also need to pay for the annual filing fees in most states to form an LLC.
Ownership Arrangement
A Sole Proprietorship can be owned by only one person. However, LLCs can be owned and run by more than one person. In fact, foreign entities, individuals, as well as other LLCs can become LLC members.
Taxation Structure
In a Sole Proprietorship, the owner is required to report their business income in their personal income tax return. Additionally, they need to pay self-employment tax as well to the federal government.
In LLCs, all the profits and losses need to pass through the personal tax returns of LLC members. However, you can also choose to get your LLC taxed like a Corporation.
Want more information about Sole Proprietorship and LLCs? Check out the infographic below by GovDocFiling:
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young.
He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
