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Sole Proprietorship vs LLC

When you are ready to start your business you must first determine the legal structure.  There are a number of options to consider such as a sole proprietorship, limited liability company (LLC) or corporation.  Most small businesses that consist of just one member and no employees typically choose to operate as either a sole proprietorship or LLC.  But which is the best choice? 

Well, that depends on the legal and tax needs of each particular business but here are some factors you should consider: 

Formation

Sole proprietorships and LLCs are formed differently.  One requires little effort (sole proprietorship) and the other requires some official paperwork (LLC).  To operate a sole proprietorship you simply have to operate your business.  That is all.  You and the business are one and the same and so you must use your name to market the business unless you register a trade name, which is done locally in your county in New Jersey. 

LLCs require state registration, annual reporting to the state and state fees.  The process is more involved but does offer additional protection, which brings us to the difference in liability between the two structures.

Liability

As mentioned, when you operate as a sole proprietorship, you and the business are one and the same.  Therefore, there is no division between your personal assets and those of your business making them all susceptible to claims.  If your business is ever sued, you will be solely responsible for paying damages should you be found liable.  If you will operate as a sole proprietorship, strongly consider business insurance to protect your assets.   

Unlike a sole proprietorship, an LLC offers limited liability protection in some circumstances.  It provides a division between the owner of the business and the business itself.  You are a member of the business and not the business itself.  Members are not liable for most debts of the LLC and are typically only liable for their own negligent conduct.  While the LLC is not a complete shield from liability, it does offer more protection than the sole proprietorship.

Taxes

Both structures of course require you to register for and pay taxes.  With a sole proprietorship you will file your individual tax return with a Schedule C to provide your profit and losses.  The LLC is also a pass through entity allowing you to file for your business through an individual tax return, that is if you choose to be taxed as a sole proprietorship.    

As you can see, there are many factors to consider when choosing a business structure including cost, liability and taxes.  This is just an overview of considerations so be sure to speak with a business attorney for a through overview of your legal structure options.

 

This blog posting is provided only for general informational and educational purposes and does not constitute legal advice or legal opinions.  An attorney-client relationship is only established with the firm via a formally, mutually signed engagement agreement.


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