Should I form an LLC or Sole Proprietorship?
When opening up a new small business, setting up an online store or starting a freelance side job, you’re faced with the question of whether an LLC or sole proprietorship is the right legal formation for you and your needs. These two business models can make a significant difference in how you run your company from a legal, tax and management perspective.
An LLC is a legal entity formed at the state level. An LLC exists separately from its owners—known as members. However, members are not personally responsible for business debts and liabilities. Instead, the LLC is responsible. Once formed, an LLC has its own legal identity that’s separate from you, the owner. Because of this, a business creditor cannot legally go after your personal assets if your business is sued or unable to pay its debts. Additionally, an LLC’s bankruptcy is considered separate from the owners. If you have employees, an LLC can also help shield you from liability for your employees’ actions.
A sole proprietorship is an unincorporated business that’s owned by the individual running it. A sole proprietorship is the default choice for anyone who runs a business but hasn’t set up another formal business structure like an LLC. As a sole proprietor, there’s no separation between your personal and business assets and expenses. You are personally responsible for all your business’s debts and obligations. A sole proprietorship can only have one owner. If you take on a business partner, your unincorporated business will become a general partnership. Individuals that do a lot of contractual work, such as freelancers, consultants and personal trainers often choose to file their taxes as sole proprietors. This is the easiest way to go if you’re just starting out or you’re not yet making enough profit to justify the costs of an LLC. However, even if you’ve been in business for decades, a sole proprietorship may still be the best option, depending on the type of business you run. It’s all going to depend on your income, business type and your personal management preferences.
If you are wanting more information about if an LLC or Sole Proprietorship is right for you, we are happy to help. Give our office a call or text today at (206) 408-8158.
19803 1st Avenue S.
Normandy Park, WA 98148
T (206) 408-8158
F (206) 374-2810
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