Choosing a business structure is a responsible step that every entrepreneur has to take when preparing to open a company. It affects all aspects of the company, including start-up costs, compliance requirements, liability, and much more.
Often, entrepreneurs initially choose a sole proprietorship because it is the fastest and cheapest way to start a business. Over time, a business grows, and its needs and goals change. To adapt to the changes, you can consider LLC formation, which is also very popular.
In this article, we will briefly review the main benefits of LLC incorporation, as well as some of the nuances you need to be aware of in order to make an informed decision.
Sole Proprietorship and LLC as a Business Entity
What is Sole Proprietorship?
Today, a sole proprietorship is one of the most common ways of doing business. You don’t need to hire any LLC formation services or fill out numerous papers to set it up. All you have to do is get to work. According to the law, an individual who starts a business is considered a sole proprietorship by default.
If you want to start conducting transactions, bypassing the formalities associated with business formation, a sole proprietorship is the easiest, quickest, and most affordable option. However, it is important to keep in mind the consequences of choosing this business structure:
- Lack of liability protection, which can lead to serious financial losses;
- Minimum internal documentation requirements;
- Difficulties in attracting investments;
- The possibility of not filing an annual report, saving time and money.
The LLC Formation Process and Its Basic Features
In contrast to the sole proprietorship, an LLC is a formal business structure. It is a separate legal entity created by one or more participants to conduct business on their own behalf.
Generally, the best way to set up an LLC is to begin with the filing of articles of organization with the Secretary of State. There is a mandatory fee for processing the documents, which varies from state to state.
Basic LLC aspects to consider when deciding on business formation include the following:
- In the case of a corporate lawsuit, the owner’s personal assets are protected;
- In order to keep the company running smoothly and maintain a good reputation, some paperwork has to be done. This includes filing an annual report on a regular basis;
- More opportunities to attract investments.
Advantages of LLC formation
Although unlike a sole proprietorship, LLC incorporation requires more financial and time commitment, it pays off with the advantages of this business structure.
First of all, legal protection is worth mentioning. A sole proprietorship is liable for the debts and obligations of the business with all of its assets. This means that if the company is sued, creditors can take the personal property off to satisfy their claims. Depending on the field of business, this can create high financial risks, which can be avoided by opening an LLC company with limited liability. You can read how to run a successful LLC by llc.services – explication how by hiring one of the best LLC services or completing the business formation process yourself, you can conduct transactions without worrying about the safety of your personal property. Regardless of the financial status of the company, creditors’ claims will be limited to its assets.
Another strong argument for LLC business incorporation is flexible taxation. By default, a limited ;liability company with one member is taxed the same way as a sole proprietorship, i.e. the profits are shown only on the owner’s tax return. However, he or she has to pay tax on income received by the LLC company (even if part of it is permanently kept in a business account). However, LLC incorporation provides the opportunity to switch to the corporate tax system. Depending on the specifics and purposes, a company can be taxed as a:
- Sole proprietorship;
Also, unlike sole proprietorships, an LLC owner may not pay 15.3% social security tax on the company’s net income. Instead, the calculation is based on wages. Thus, LLC formation contributes to a more economical expenditure of funds.
Can Every Sole Proprietorship Transfer to an LLC?
If you are planning to change your business structure from a sole proprietorship to a limited liability company through LLC formation services or on your own, it is important to know that there are a number of restrictions.
For example, in some states, LLC incorporation is prohibited for certain categories of licensed professionals. For example, one of them is attorneys. In other states, professionals may be allowed to start an LLC, but this does not protect them from being sued for malpractice.
Is It Worth Hiring a Professional LLC Service to Start a Business?
There are many useful business formation guide sites today. But as a sole proprietorship, you may be too busy to start a company yourself. Fortunately, you can outsource your business startup to specialized LLC creation services, which will take care of all the formalities.
In order to make your cooperation with an LLC website productive, we recommend choosing one of the best LLC services, such as LegalZoom, Rocketlawyer, or ZenBusiness. That way, you can get a quality business formation service and get started quickly. In addition, after buying a service package, many online companies will also give you access to a wide range of ready-made business solutions. They provide a variety of services to make running a business easier, from reporting to helping you expand to another state.
On top of that, some of the incorporation services give you a great opportunity to save money. For example, with IncFile, you can get the cheapest LLC formation in the industry by paying only a $0+state fee to incorporate an LLC and 1-year registered agent service. Considering that a registered agent is required for every state-registered company, this is an excellent offer.
Sole proprietorship and LLC incorporation are two of the most popular ways to do business. Each offers a unique set of terms and conditions that may be relevant at some point in your company’s development.
However, circumstances often change over time. If you’re thinking about growing and expanding your business, an LLC company is a good option that offers many advantages. With tax and structural flexibility, you’ll be able to set up your business in the best way possible. In addition, you’ll protect your home, car, and savings in case of unforeseen circumstances, which is especially important if your business involves serious risks. Of course, compared to a sole proprietorship, the business formation of an LLC requires more time and money, but it pays off in the certainty you get in return.
If you’re interested in LLC formation but don’t know what to start with or just don’t like paperwork, consider hiring an online company. Today’s marketplace offers dozens of LLC formation services. So, you can choose the professional service that’s perfect for your budget and needs.
Also, you can contact an attorney to get detailed advice about the types of business structures. An experienced professional will not only answer your questions but also help you make the right choice based on the specifics of the state, the industry you have chosen, and the specifics of the company.