Did you know that thousands of businesses are started in the United States every year? The country reported 4.41 million new business applications in 2020.

As an entrepreneur, one of the most important decisions you’ll make is choosing your business structure. It will impact the management structure, tax implications, and other operational processes of your company.

Most business owners either choose to run a Sole Proprietorship or a Limited Liability Company (LLC). Let’s take a closer look at the differences between these two entity types to help you make a choice.

Sole Proprietorship vs. LLC: Ownership

A Sole Proprietorship is owned and run by one person.

One or more people can start, own, and run an LLC. Owners of an LLC are called members and they can be individuals, other LLCs, and foreign entities. However, banks and insurance companies can’t be members of an LLC.

Sole Proprietorship vs. LLC: Formation Process

A Sole Proprietorship is easy to set up with no additional formation requirements if the owner operates the business under their own name. To run a business under a fictitious company name, you will need to file for a DBA (Doing Business As) in your state and pay a filing fee.

On the other hand, forming an LLC requires that you file Articles of Organization with the Secretary of State. You will also need to create an LLC Operating Agreement to define the roles and responsibilities of each member and manager (if any).

You will need to pay a state filing fee that varies between $50-$500 across states. As an LLC owner, you will also have to pay ongoing annual filing fees in most states.

Sole Proprietorship vs. LLC: Tax Implications

A Sole Proprietorship provides pass-through taxation, which means that you will have to report business income on your personal income tax return as the owner. You will also need to pay a self-employment tax to the federal government.

LLCs also offer pass-through taxation, which means that the profits and losses of your company will pass through to the personal tax returns of each member. You can also choose to have your LLC taxed as a Corporation.

Regardless of the entity type you choose, make sure that you complete all legal requirements and paperwork correctly.

To simplify the process for you, we offer one, simplified online application for both state and federal filings. You can take advantage of our secure and cost-effective filing services to launch your new business.

Want to learn more about the key differences between a Sole Proprietorship and an LLC? Check out the infographic below by GovDocFiling. It will also help you make an informed choice when it comes to choosing a business structure for your new business.

Sole Proprietorship vs. LLC: Which One Is Right for Your Business?

Image Courtesy: GovDocFiling