Deciding Whether to Register Your Sole Proprietorship as an LLC
When starting a new venture, a common question for entrepreneurs is whether their business should be a sole proprietorship or a single-member LLC. Your best choice depends on your business goals and your personal circumstances.
What is a sole proprietorship?
In a sole proprietorship, there is no separate business entity. It is the simplest form of business to start and run. The owner is the business, and they do not have to register with the state as a corporation or LLC. However, they may still have to register for business licenses or permits, depending on the nature of the business. While it is important for the owner to separate their business assets from their personal assets, there is no legal distinction between the two. A sole proprietor is responsible for paying both income taxes and business debts. If your business goes into debt, a creditor may go after your personal property.
What is a single-member LLC?
A single-member limited liability company (SMLLC) functions as a regular LLC, but with only one member. This allows single business owners to act as an LLC. The benefits of this are that an LLC provides asset protection that a sole proprietorship does not have. Your LLC is separate from your personal assets. To form an LLC, you must register with the appropriate agencies and pay a filing fee. The state does not require you to file annual reports or keep minutes for your business, but it is still important to keep records.
A sole proprietor must report profits and losses on a personal income tax return on a Schedule C filed with a Form 1040. The business itself is not taxed separately from the owner.
A SMLLC is treated as a “disregarded entity” for federal income tax purposes unless it formally chooses to be treated as a corporation. This means that profits and losses are reported via the individual member’s Schedule C, as with a sole proprietorship. The SMLLC does not need to file a tax return.
Which should you choose?
As a small business owner, you have to determine what type of business you want to run. An SMLLC provides more protection than a sole proprietorship, but it also requires more work and upfront costs. If you envision your business growing to be larger than just a single member, forming an LLC is a good way to protect yourself as the business grows.