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Difference between Sole Proprietorship and LLC
Sole Proprietorship and LLC are business structures for private companies, with notable differences between them. Many people get confused between them and use them interchangeably; this article will help you understand the difference between Sole Proprietorship and LLC and how they operate in different ways.
What is Sole Proprietorship?
A sole proprietorship is when an individual, company, or limited liability partnership owns and controls the whole business. This type of business will not have any other partners. This type of business will not have a separate business entity from the business owner, it is considered the same, and the business owner is liable for all the debts and losses. The business can be sued or sued in the owner’s name. Here, if the company goes on a loss, the creditor can withhold the property and money of the business owner.
What is Limited Liability Company (LLC)?
A limited liability company, also shortly referred to as LLC, is a private company's business structure consisting of one or more owners referred to as “members”; these members participate in the critical decisions of the management. An essential feature of this structure is that it protects the owner from personal liability and debts and provides a flexible management structure and certain advantages concerning taxes. If the business is lost, the creditor cannot legally approach and withhold an LLC member’s money or property; they can only withhold the company’s assets or what the member has invested in the company.
Difference between Sole Proprietorship and LLC
The following table highlights the major differences between Sole Proprietorship and LLC −
Factors | Sole Proprietorship | LLC |
|---|---|---|
Determining
factor | Run by a single owner. | Run by members of the company. |
Entity | The company and the owner won’t
have any separate legal entity. | The company and the members have
the separate entities. |
Forming
Formalities | To form a sole proprietorship, the
owner needs to make sure that the
business name should not the same
as another business in the same
territory. | To form an LLC in the company, the
members must register as per the
Country’s regulations. |
Number of
owners | A sole proprietorship consists of a
single owner. | LLC comprises one or more owners, who
might also be corporations, business
partnerships, or foreign businesses. |
| Starting
capital | To start a sole proprietorship, there
are no fees borne by the owner | Forming an LLC costs a lot of capital;
an average price would be $100 to
$800. |
| Tax
implications | There is no difference between
personal and business taxes, as
business income will be considered
the owners’ income. | Here each member is taxed individually
based on their income. |
Income/profit
share | Personal and business income are
merged. | Personal and business income are
separate entities. |
Decision
making | The business owner is the only
decision-maker. | Decision-making is complicated, as all
the members will be equally involved. |
Control | The owner has complete control
over the company. | All the members of the company
control the business. |
Liability | The owner is solely liable for all
the legal and financial
transactions. | The company is responsible for the
legal and financial transactions and not
the individual members. |
Paperwork | No paperwork for this type of
business structure. | Less paperwork. |
Business
longevity | It entirely depends and exists upon
the incapacitation of the owner. | It may still exist irrespective of who the
owners are. |
Regulation | Requires simple licenses and
permissions. | Requires a lot of complex documentation
and operating agreements. |
Business
control | Only the business owner has all the
control over the company . | All the members have equal control
over the company. |
Maintenance
and
operations | Low maintenance and limited,
simple operations. | High maintenance with complex
structured operations. |
Risk factor | It is suitable for low-profit/lowrisk
income. | It is suitable for higher risk business
that wants to grow. |
Conclusion
Both Sole Proprietorship and LLC have their advantages and disadvantages. Knowing when to use an LLC or sole proprietorship for your start-up is essential. To summarize, a sole proprietorship is a business controlled by a single owner; it is a good option for small companies with lower risks. It allows the business owner to enjoy all the profit and take liability for all the losses. It is also one of the easiest and most cost-effective types of business structure where business owners control all the management. Still, the business here only exists till the business owner dies, retires, or decides to sell the company.
On the other hand, LLC is a business controlled by multiple members and a good option for more prominent firms with higher risks. It has a fixed share of income for all the members and protects members’ personal property, but it is an expensive and highly organized business structure. In LLC, members must hire an external employee to manage the company. LLCs can exist forever as long as the company can sustain the business.
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