LLC, Sole Proprietor or Corporation

A sole proprietorship is a type of business structure where there is no separation between the assets and liabilities of the business and the assets and liabilities of the person who runs the business.

Sole proprietorships are run by only one person and you usually don’t need to officially register it. However, because there is no legal separation between your personal money and your business money, this opens you up to some risk. Let’s say your business got sued and you don’t have enough revenue to cover the damage. Your personal assets could be used to settle the legal consequences even if your business doesn’t have enough money.

However, if you were operating as another type of entity, like an LLC, you do get that layer of protection from having your personal assets used to settle business debts and liabilities.

What types of businesses are sole proprietorships?

Sole proprietorships are the simplest business structure and because of this, they can sometimes be well suited for certain types of businesses. For instance, if you run an Etsy shop on the side or you’re a freelance writer, it can make sense for you to be a sole proprietor.

Sole proprietorships are great for businesses that don’t inherently involve much legal risk or liability. Photographers, tutors, graphic designers and even some types of content creation businesses are generally safe bets for sole proprietorships. Of course, if you choose to add that layer of protection by registering as something other than a sole proprietorship, it doesn’t hurt.

LLC stands for “limited liability company” and it’s a business structure that separates the owner’s personal assets and liabilities from the business’s assets and liabilities. That’s what the “limited liability” refers to. Again, sole proprietorships don’t get this type of protection.

You will need to register an LLC with the state in which you’ll be operating your business. Registration means submitting an Articles of Organization and an operating agreement, as well as completing a state form if required. After your formation documents are in order, you’ll want to apply for an Employer Identification Number (EIN).

The owners of the LLC are called members so if you’re flying solo on your business, you’ll be a single-member LLC. But if you have more than one owner, you’ll be a multi-member LLC.

LLCs don’t typically file their own income tax return. Instead, the profits and losses flow directly through to the owner, and the owner reports those profits and losses on their personal income tax return. This is why LLCs can sometimes be known as “pass-through entities.”

However, LLCs can also choose to be taxed as C-corporations. If you choose to be taxed as a corporation, you’ll have to pay corporate income taxes and you’ll pay taxes again on your distributions as an individual.

So why would an LLC choose to be taxed as a corporation if you could potentially be taxed twice?

In some cases, the corporate tax rate can be lower than the LLC owner’s individual tax rate. So you might end up paying less in taxes by choosing to be taxed as a corporation. Also, if you decide to offer certain benefits to your employees, you can deduct them if you’re taxed as a C-Corp.

What types of businesses are LLCs?

Registering as an LLC can be a good choice for many different kinds of businesses including online e-commerce businesses, consultants, production companies, beauty services, food and beverage services and more.

An S-Corp is a type of tax structure that allows profits and losses to flow through to the owner’s personal income tax return, just like with an LLC. Remember how we said that C-Corps pay a corporate tax rate and owners get taxed on their distributions? An S-Corp lets you avoid that double taxation while still having that liability protection that lets you separate your personal assets from your business assets.

The owners of an S-Corp are often called shareholders (unlike with an LLC where they’re called members). S-Corps also can’t have more than 100 shareholders but you don’t have to be an individual to be a shareholder. Shareholders can also be trusts, estates and certain organizations but they cannot be financial institutions, insurance companies or domestic international sales companies.

If you plan to have an S-Corp, you’ll need to follow some additional rules like holding annual meetings and providing salaries that are considered “reasonable” to all shareholders.

What types of businesses are S-Corps?

Companies that plan to hire a large number of employees or that could have a number of shareholders are generally good candidates for an S-Corp. Some examples may be stores, construction companies and family businesses.

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