When it comes to picking a business entity, you have a lot to choose from–Sole proprietor, LLC, S-Corp, C-Corp—it can be confusing. So how do you know which type of entity to file? What’s the difference and what makes one better than another?
First of all, it is your business, so you get the final say in how you run it. However, I will say that after twenty-plus years of business endeavors, I almost always recommend my clients begin as an LLC, especially over a Sole Proprietorship.
Why do you even need to form a legal entity? I’m surprised how often I get this question. Plain and simple: you want to make it official and legal, especially if you plan to claim any tax deductions. You want to establish your business as a legal entity so you are running legally, but also because you want to protect yourself and your money.
That’s really the point—protection of your personal assets. That is why I do NOT recommend Sole Proprietorships. Let me break it down.
It is easier to manage and file for a Sole Proprietorship (on your taxes it’s just a Schedule C) than other entities. Technically, you don’t even have to get a separate business account (though you should). This type of business could fall into just a DBA, doing business as, or an assumed name certificate.
It is super cheap and very easy to manage because basically there is no difference between you and your business. That means legally there is no difference, which means if you get sued, you are screwed, and depending on the state, you could lose just about everything you own! Although it can be easier to start up as a Sole Proprietor, in the long run, you will most likely want the protection an LLC provides.
With an LLC or Corporation, you are creating a shield. If your business gets sued, you are only liable for what’s in those business accounts and the business itself. So, if you get sued for $10 million, but your business is only worth $1,000, you might forfeit that $1,000 and maybe even the business, itself, but you walk away after that. And THAT’s why I love an LLC. That protection is everything.
From a tax perspective, as an LLC, you are looking to file a 1065 and a K-1. And those letters and numbers might mean absolutely nothing to you, but it’s important to know that you have to file them. As a new business owner, it’s easy to lose track of all the paperwork you need to file, so it’s vital to keep track early in your business. I highly recommend both bookkeeping software, like QuickBooks, as well as hiring an accountant or CPA.
As an LLC, there is also one really great thing to note about taxes– you basically get to tell the government how you are going to be taxed. As a single member (aka just you own the business), it’s basically a Schedule C disregarded entity. If there is more than one member you are a partnership and you would get a K-1, but either way, these are pass-through entities. But let’s say you want to be taxed as an S-Corp. As an LLC, you can literally tell the government that’s how you want to be treated. And that’s pretty cool because other entities don’t get to do that.
So, if you are debating between becoming a Sole Proprietorship or an LLC, I recommend choosing an LLC. If you are debating a corporation, I would recommend seeking out a business and tax lawyer as there are many tax considerations that may or may not affect you (and your bottom line). Don’t do this alone, especially if anything you have read today was just gibberish to you. There is a reason why professionals exist.
And speaking of professionals—I am a business coach and consultant, not a lawyer or CPA, so please seek guidance from specific professionals if you need it. This article is merely meant to help you understand the reasons why I recommend LLCs over Sole Proprietorships. It is not intended to act as legal advice.
If you have questions, be sure to add them to the comments and I’d be happy to help where I can!
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