When you first open a business, you have a lot of decisions to make. Choosing your business structure is one of the most important decisions you will make. Your business structure refers to the entity that you form so you can practice business in your state. You cannot sell a product or service without forming a business entity. Many new entrepreneurs have to decide between an LLC (limited liability company) and a sole proprietorship. The truth is that there isn’t one single answer to the question of LLC vs. sole proprietor, and you should obtain the help of a qualified business advisor to make this decision.
LLC vs. Sole Proprietorship
There are many situations where an LLC is a better choice than a sole proprietorship, especially if you are looking for a way to move the liability of the company away from your personal assets.
- If debts are incurred in the name of the business, you will not be personally liable to pay those debts if your company encounters financial difficulties that are not able to be overcome.
- An LLC can also be beneficial if you are looking for a way to raise capital in the future, because you will have detailed company financial records that you can show to potential investors.
- You have the option to transfer business assets as needed, which is important if you are looking to sell the business in the future.
- The operating agreement of an LLC can be used to decide how the ownership interests will be transferred to a third party.
One of the biggest advantages to an LLC is the fact that you are taxed on a “pass-through basis,” which helps you to avoid the situation of double taxation, where the business pays taxes on its income and the owner is also required to pay taxes for personal earnings received from the business.
Your Business Advisor
While you are considering the llc vs. sole proprietorship decision, it is important that you talk with a small business advisor. The experienced advisor can evaluate your personal situation and make recommendations to match your needs.
Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting and bookkeeping services for new business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.