Single-Member LLC vs. Sole Proprietorship

One of the first things that a solo entrepreneur must consider once the decision has been made to go into business for him/herself is whether the business should be set up as a Sole Proprietorship or Single-Member LLC. There are advantages and disadvantages to both, and you have to consider them carefully before choosing which one is right for you. In this Single-Member LLC vs. Sole Proprietorship article we will address some of the differences between sole proprietorships and single-member LLCs so that you can decide which business entity best fits your goals.

Sole Proprietorships

Sole proprietorships are simple, inexpensive to form, and are very popular business entities. You can open and start your business without any formal or even handwritten agreements. You are the boss and you make your own rules. For IRS tax purposes, a sole proprietor’s profit (or loss) is taxed on his/her individual tax return (1040 Schedule C)…there is no separate federal tax return for a sole proprietor to file.

However, the main limitation to a sole proprietorship is the lack of liability protection for the owner of the business. Because the owner and the sole proprietorship business are viewed as one and the same, if the business is sued, your assets could be at risk. You are personally responsible for your business debts.

Single-member LLC (SMLLC)

Single-member LLCs are now allowed in all 50 states and are becoming a very popular choice for solo entrepreneurs. Here are a few more ways a SMLLC differs from a sole proprietorship:

  1. There is more paperwork to form a SMLLC than a sole proprietorship; there are required filing fees, and articles of incorporation/formation are submitted to the state in which you want to create your LLC.
  2. You will be able to put “LLC” behind your name which gives you added credibility to your customers and vendors.
  3. A SMLLC comes with tax flexibility. For example, a SMLLC can elect to be treated by IRS as an S corporation for savings on your self-employment taxes (or C corporation for that matter). If you do not file an election to be treated as a corporation, the SMLLC is “disregarded” for income tax purposes, and all of your SMLLC’s income is reported on the owners’s Form 1040 Schedule C…just like a sole proprietorship.
  4. A SMLLC comes with liability protection for the business owner (as long as the LLC is formed and operated properly).
  5. A SMLLC have a perpetual existence. In other words, they can last indefinitely. Unlike a sole proprietorship, the business does not terminate if the owner dies.

These being the main differences in sole proprietorships and SMLLCs, hopefully you may be able to determine which business format works best for you.

  1. Can I convert my sole proprietorship business to an LLC?

  2. Sure. The first step is to create a single-member LLC (SMLLC) with the appropriate state. After the SMLLC is formed, you will want to (1) get an EIN and bank account; (2) transfer the assets of the business to the SMLLC; (3) assign/update existing contracts (insurance, leases, vendor agreements, service contracts, etc.); and (4) abandon/withdraw any DBAs that were used by the sole proprietorship (re-file in the name of the LLC, if applicable).

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