Choosing Between Sole Proprietorship and LLC: A Guide for New Business Owners

You’ve decided to take the leap and start your own business – and I am here for it! Before you start working with clients, you want to make sure you’re taking the proper steps to have a legally-sound business.

You need to decide on a structure and register your business with your state. Most new business owners choose to either function as a sole proprietorship or form a Limited Liability Company (LLC). Don’t worry, it isn’t as complicated as it sounds! 

So which is the better choice for you?

What is a Sole Proprietorship?

A sole proprietorship is the most basic and common structure for small businesses. Establishing one just states that you as an individual are operating a business. There’s often no formal registration needed, but a quick google search for “establish sole proprietorship + [your state name]” will quickly refer you to a state website to check if your state requires any licenses or permits.

As a sole proprietor, you and your business are one and the same for both legal and tax purposes. You report your business income and expenses on your own tax return. Your business is not a separate entity from you. And given that there is no separation between your business and personal assets, you are personally liable for any legal or financial issues that may arise.

This is commonly the first choice when a business is brand new, does not anticipate making a huge amount of sales or profits, and is not taking on a large client load. It’s also the easiest and quickest route to take, which makes it desirable so you can get started ASAP.

Pros of a Sole Proprietorship

• Easy and inexpensive to form – no formal registration requirements (usually)
• You have complete control over your business as the sole owner
• Tax filing is way more straightforward
• Easy to dissolve if your business doesn’t work out

Cons of a Sole Proprietorship

• No liability protection – you are personally responsible for all company debts and liabilities
• If desired, you may not be able to get a business debit or credit account without your business being a separate entity

What is an LLC?

A Limited Liability Company (LLC) is a more formal business structure that you must register with your state. It establishes you, personally, as a separate legal entity from your business. This protects your personal assets!

Forming an LLC requires more work upfront. There’s paperwork to fill out, forms to send, and fees to pay. But this route provides you with important legal protections. It sounds like a lot… but your state website will have clear instructions on exactly what you need. It’s definitely doable on your own (I did it without outside help!), but there are also a million companies out there that will help you establish an LLC if you don’t have the time or mind for it. 

Pros of an LLC

• Liability protection for your personal assets from business debts or lawsuits
• Increased credibility with customers as a legally registered business
• Option for separate business bank accounts and ability to build business credit
• Potential for some tax benefits

Cons of an LLC

• More complex process to establish. And more expensive due to filing fees.
• Requirement to draft operating agreement and other state-dependent formalities to address
• Ongoing admin work – making sure you remain compliant (e.g Certificates of Publication)
• Self-employment taxes still apply if single owner, reducing some tax benefits

The Verdict

Personally speaking, the legal and financial repercussions of something going awry with a difficult client scared me into establishing an LLC right off the bat. Business was new for me. Working with clients was new for me. I had to account for my potential mistakes, and clients’ potential lack of patience and understanding. I was not in a position to pay my way into and out of a lawsuit. And let’s face it, Americans love to sue. So personally, that was the right choice for my peace of mind. 

For most new entrepreneurs or side hustlers still testing an idea, a sole proprietorship offers the easiest and most flexible way to get started. Skip the fees and paperwork and test the waters. And it gives you the flexibility of pivoting your business idea easily and without paperwork. Starting as a sole proprietorship means you can just do your thing, focus on your offerings and marketing; and once you truly understand the direction you’re going and maybe making some money, then you can start transitioning to an LLC. 

Have more questions about whether to start your business as a sole proprietorship or LLC? Comment below, contact me through my website, or send me an email, and I’ll do my best to help you out or send you in the right direction. 

Disclaimer: This is not legal advice by any means; every person is in a unique situation and every business has different needs. The choice is yours!