I help many small businesses with tax planning and filing. Many new entrepreneurs have to decide between an LLC (limited liability company) and a sole proprietorship. The truth is that, although the selection of a business entity is an essential decision, there isn’t one single answer to the question of LLC vs. sole proprietor. The implications for liability and tax status are two of the issues to consider.
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.
Pass-Through Tax Status
One of the biggest advantages to an LLC is the fact that you are taxed on a “pass-through basis,” which means that the taxes of a business are "passed through" to the tax return of the individuals owning the business. The Tax Cuts and Jobs Act of 2017 contains some changes that have potential benefits for eligible pass-through businesses, including a deduction of 20% of "qualified business income" (QBI). The calculation for this deduction can be complicated, so it is advisable to consult with a tax professional.
Your Business Advisor
Before you jump into the decision about which is the right structure for your business - llc vs. sole proprietorship - it is important that you talk with a small business advisor. A professional with experience and expertise can evaluate your personal situation and make recommendations to match your needs.
Let us help you plan ahead for growth!
Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting and bookkeeping services for small businesses. If you are looking at options for business entities, give us a call. We invite you to learn more about our available business advisory services: (202) 789-8898.