Sole Proprietorship vs. LLC: What’s the Difference?
It takes a special type of person to become an entrepreneur. While they come from all walks of life and all industries, one thing they have in common is their drive to make a change and an impact. It’s a tough road, but with tenacity and grit, you can make it. One of the most fundamental first steps of launching a business is determining its structure. Most common are sole proprietorships and LLCs. What’s the difference – and which is right for you?
Sole Proprietorship vs. LLC
Let’s look at some definitions first:
Sole Proprietorship:
This is fast and simple to put into place. Your business structure is directly tied to you. You have control over its direction, and you are responsible for any and all taxes. You will report business income or loss on your personal income taxes. If you do not pay, you can be held legally liable. You are also personally liable for debts or if your business is sued.
On the plus side, sole proprietorships are free and easy to establish. On the downside, it may not offer you all the protections you might want. For example, if you are sued, your personal assets (e.g. house, car, savings, etc.) are at risk.
LLC:
A Limited Liability Company protects you from some liabilities. Unlike a sole proprietorship, you are not the company. In other words, you and the business are considered separate and distinct entities. If someone files suit, for example, it is the business that is the defendant, not you personally. This reduces the risk to you personally.
As with a sole proprietorship, your taxes are passed through to your personal income taxes. The business itself is not taxed.
LLCs are more involved to establish: you must register with the state, and there are costs associated with this.
Now, determining which business structure is right for you depends on many more factors than taxes or liability. In addition, you must consider:
1. Employees.
As a sole proprietor, you can hire as many people as you wish. However, if there is an issue, you are personally liable for injuries, expenses, etc. You must have an Employer Identification Number (EIN) issued by the IRS, file tax returns, and pay payroll tax. The business’s taxes are passed through to your own income taxes.
This also applies if you hire employees as an LLC. Remember: members (what the owners are called) of the LLC are considered to be self-employed; you will be responsible for your own taxes.
2. Registering with the State.
In Florida, sole proprietorships are the default structure for any new business. You may still need permits and licenses, depending on your industry and jurisdiction. Simple! LLCs are more complex. As mentioned you must register with the state and file “Articles of Organization,” which outline the owners (members), as well as their rights, powers, and responsibilities. Fees apply. You must also publish notification of your LLC’s formation in two designated newspapers within 120 of filing.
It gets even more complex if your LLC operates in more than one state. You will file for “foreign qualification” in the other state(s). To do this, you’ll need to file a Certificate of Authority with those states. They may require you to provide a Certificate of Good Standing from Florida (or your home state).
3. Business Name.
Naming your business is critical. With a sole proprietorship, you can use your own name and get to work. If you want to choose a different company name, you register a trademark or Doing Business As (DBA) with your state or county clerk.
As expected, it’s a bit more complex for an LLC. Your Secretary of State’s office conducts a search to make sure that no other business entities are operating under that name. It’ll also include “LLC” or “limited company” in the name.
Whether you opt to establish yourself as a sole proprietorship or an LLC, you will need office space to launch your business into its next chapter. While leasing or buying is an option, it can be a cost-prohibitive move in some markets. Instead, consider taking advantage of flexible office space in Downtown Tampa.
Office Evolution offers solutions that meet the needs of budding businesses, including dedicated desks, conference rooms, private offices, shared workspaces, and virtual offices. You can use the space you need, when and how you want it. There’s no need to get tied into long-term leases or “make do” with space that doesn’t truly fit your needs. When you need to expand or contract, you can do so while meeting the constraints of your start up budget.
Additionally, you can take advantage of the connections you make. Whether it’s just socializing in the coffee room (that’s great for productivity and morale, after all!) or building contacts that are mutually beneficial, Office Evolution’s beautiful Harbour Island location makes it easy.
To give your business a competitive edge, contact Office Evolution Tampa Harbour Island today.