Excited to get to the fun stuff but bogged down figuring which business structure– single member LLC or sole proprietorship– is best for you? We break down both below to help make the decision clear and simple.
Starting a business is exciting. There are conversations about, “what will the product look like?” and “how will we target our customers?”
But there are other questions which are also important but often overlooked. One such question is, “what is the best structure for my business?”
When it comes to just starting out and just being on your own (especially if your business is designed to just be you), there are two main options most choose to go with:
- A single member LLC, or
- A sole proprietorship
Deciding which of these two business structures is best for you is an important question to answer as it can affect several different aspects of your business.
Let’s talk about the major differences between each so you can have a good idea of which is a better fit for you.
What is the difference between a single member LLC vs. sole proprietorship?
Let’s start by talking about what makes a single member LLC and sole proprietorship different, as understanding the difference between the two is half the metaphorical battle:
Sole proprietorship defined
A sole proprietorship is a business owned by a single individual. If you start a liquor store, retail clothing shop, or marketing agency online and it’s only you running the business, without any additional paperwork done you’ll automatically be considered a sole proprietor.
The only important detail is in terms of the name of the business.
As a sole proprietor, you’re doing business as yourself– you are the business– so your name either needs to be in the business name or you’re doing business under a DBA (“doing business as”) and your DBA registration needs to be recorded with the state and, in some states, announced in a local newspaper to make it aware of who is doing business under the fictitious name.
Single member LLC defined
A single member LLC, sometimes referred to as a ‘sole member LLC’, is an LLC (or ‘limited liability company’) structure with a single member like a sole proprietor but which offers a few more bells and whistles being that it’s an LLC, mostly in the case of insurance to protect you against liability claims on your business and your personal assets.
In the case of a single member LLC, you must submit an Articles of Organization with your state when forming the LLC (as well as a single member llc operating agreement in most cases).
Also, when forming an LLC, the business name is registered, so there’s no need to file for a DBA or fictitious name as in the case of a sole proprietor.
Single member LLC taxes also work a bit differently than a sole proprietor as well as we’ll talk about later.
How are they alike?
In addition to understanding the basic differences between the two, it’s also important to understand how they’re alike (because they have quite a few similarities).
No matter whether you choose a sole proprietorship or single member version of an LLC, for both you’ll have to:
- Apply for relevant business licenses and state/city permits
- Obtain an EIN number, which will allow you to do things such as open a business bank account and hire employees, and
- Withhold taxes when your business eventually takes on employees
Single Member LLC vs. Sole proprietorship: What are the benefits and drawbacks?
Now that we’ve broken down the basic differences (and similarities) between a sole member LLC and sole proprietor, let’s talk a bit about why you might choose one over the other.
Here are the benefits and drawbacks of both a sole proprietorship and single-member LLC:
Benefits of a sole proprietorship
- Very simple to set up: A sole proprietorship is very simple to set up, especially if you use a site like Legalzoom that helps with paperwork and registration.
- Less paperwork to maintain: Unlike LLCs and corporations, sole proprietorships require very little paperwork to set up and little to none to maintain.
Drawbacks of a sole proprietorship
- No liability protection: In a sole proprietorship, you’re on your own. If you go into debt, you’re liable for paying back that debt, even if it requires you to give up personal assets. That’s not the case in an LLC, which protects your assets in certain cases.
Benefits of a single member LLC
- Liability protection: As the name implies, an LLC offers you limited liability protection, which protects your personal assets from debts against the business.
- Tax benefits: A single member LLC can choose to be taxed as a sole proprietorship or corporation, which means you can choose to take advantage of corporate tax benefits as a “pass-through” entity, reducing your tax burden.
Drawbacks of a single member LLC
- It can be more difficult to obtain credit than a traditional corporation: It can be more difficult for you as a single member LLC to be approved for credit when compared to a full-on corporation (though you’re in the same boat as a sole proprietorship).
- Increased maintenance: LLCs require more upkeep, given that they’re halfway to being a corporation. That means more paperwork and maintenance in general.
- Some states don’t allow single member LLCs: This less a drawback and more of a simple fact, but it’s important to mention.
Sole proprietor or single member LLC: Which should you choose?
Now that we’ve broken down some of the pros and cons of both a single member LLC and a sole proprietorship, you should have more clarity about which is the best fit for your new business.
An LLC costs a bit more to get up and running and more work to maintain, but the liability protection and tax benefits you get from operating a single member LLC will, in many cases, far outweigh those drawbacks.
However, at the same time, the simplicity of a sole proprietorship is unmatched. If you just want something simple that allows you to get your business moving without worrying about so much administrative upkeep, that might be the way to go for you.
Whether you choose to run your business as an individual sole proprietor or single member llc, what’s important is that you’re making an informed decision that will help move your business forward based on your preferences and goals.
Analyze the facts, consider what is most important to you, and choose the structure that will best help you focus on what matters: building your business.
