OT/Business Start-up 101 - Sole Proprietorship VS LLC
I chose to start a LLC because of the "limited" liability of the structure. In other words, if the worse case scenarios happens and the business goes belly up....I don't have to worry as much about having my personal assets attached for debts of the company. In a sole propietorship....you ARE responsible for all debts and liabilities. I also found out that it does not involve too much extra effort to start a LLC....just a few more forms. Well worth it to me. In PA, the fictitous name of the LLC is a part of the fee..whereas with a Sole propiertorship...you have to pay a separate fee to register the fictitious name. So really no big cost difference at start up.
Sole Proprietorship Vs LLC
Difference between Sole Proprietorship and LLC
A sole proprietor owns an unincorporated business that is not registered with the state unlike a corporation. There is very little government regulation since it is not a separate legal entity. The proprietor is entirely responsible for the debts and the assets of the company and reports business income as personal income. Although, unlimited liability is a distinct disadvantage, a sole proprietorship is not taxed at the entity level for the simple reason that it is not considered a separate legal entity!
A limited liability company (LLC) enables entrepreneurs to combine the limited liability feature of a corporation with the single taxation feature of a sole proprietorship. Unlike a sole proprietorship, that is established by an individual, a limited liability company can be formed by one or more members. The members may be individuals, corporations, other LLCs or foreign entities. The interest or the share of the members in the company is expressed in percentage.
Read more on: · An Explanation of LLC (Limited Liability Company) · Starting an LLC · Limited Liability Company: Disadvantages of LLC Sole Proprietorship Vs LLC
As far as similarities are concerned both business structures are not convenient from the perspective of raising additional capital. A proprietor has a great deal of managerial flexibility. However, in case of the members of the LLC, the flexibility as regards management is contingent on the operating agreement. In order to make a comparative study between LLC vs sole proprietorship, we need to examine both the similarities and the differences between the two business structures. So, here goes...
Taxation
The way the business in taxed is of utmost importance while making a comparative study between a sole proprietorship business vs LLC. The absence of double taxation makes a sole proprietorship, a highly desirable business structure. The income flows directly to the sole proprietor and the recipient is required to pay self-employment tax. Since the Internal Revenue Service (IRS) does not recognize LLC for the purpose of taxation, the LLC may choose to be taxed as a sole proprietorship or a partnership. In this case, the members are expected to file tax returns individually while the LLC files tax returns with the IRS only for the sake of providing information. It would behoove the readers to note that although a limited liability company provides the management the flexibility and the benefit of pass-through taxation, LLC may choose to be taxed as a corporation. This is possible since the IRS does not recognize LLC as a classification for tax purposes.
Liability
A sole proprietor has unlimited liability and may be required to use personal property for the sake of assuaging the debts of the business or for tackling lawsuit settlements. In case of a limited liability company, there is a clear demarcation between the business entity and the members. Thus, theoretically, the members are not liable for business debts. However, by providing personal guarantees or by signing contracts in their name, members become liable for business debts. In case the book-keeping is not up to the mark, the members may be held responsible for the debts of the LLC.
Formation
The cost of formation of a limited liability company is around $700 which is the same as the cost required to form an S-Corp. A sole proprietor is not required to file with the state. In other words, the formation cost of a sole proprietorship is nil since there is no state specific filing fee.
Continuity
A sole proprietorship is terminated when the proprietor decides to quit doing business. If the operating agreement allows for the transfer of interest, the members of the LLC can transfer their shares, thus ensuring the continuity of the limited liability company.
Read more on: · Business Partnership · Corporation vs LLC · Incorporation The above discussion would have clearly outlined the differences in the business structure between a sole proprietorship vs LLC. Considering the cost of formation and the ease of operation, a sole proprietorship may be a suitable business structure provided the entrepreneur is willing to contend with the repercussions of unlimited liability.
By Aparna Iyer
Published: 11/17/2009
If you have investors to help you get started, an S-corp may be right for you. Check out the S-Corporation link. Each investor will own a share as a percentage of the companies total equity. Profit and losses are distributed so the investor recieves a tax statement to report at tax time.
Many of us turn to family and friends to get started. Some potential investors are easier to persuade if they have a legal share as opposed to giving you a loan. You as management still control the business.
on 12/2/09 1:43 am, edited 12/2/09 1:43 am - Sweet Dreams lives in , PA
@ Many of us turn to family and friends to get started.Thats the EXACT look I would get if I asked anyone in my circle for money. I don't know....its a shamed to say it...but I think I would have less hassles keeping family and friends out of it but your idea makes me want to think a little harder about who I might be able to bring in with me.
I was thinking that I would start the LLC and then convert to a corporation later. Well....your message made me do a google and hummmm if what this fella says is correct...it might be best to start the corporation now. I was going to file all my paperwork at the beginning of the year.
One result from my google search:
Last week, I blogged an answer to the question “What’s The Best Corporate Structure For An Early Stage Company?“ A few people responded asking why I didn’t like LLC’s more.
While there are several advantages of an LLC over an S-Corp (ability to issue different classes of securities, ease of set up, informality of operating agreements, lower state taxes, non-US investors), venture funds typically cannot (or don’t want to) invest in LLCs. When a VC invests in an LLC, they risk getting an income tax called UBTI (unrelated business tax income). This type of income is frowned upon by investors in venture funds partnerships and most funds have a provision in their fund agreements that they will use best efforts not to bring UBTI into the partnership. As a result, VC funds shy away from investing in LLCs.
The able minded entrepreneur says “yeah Brad, but I’m not ready for venture capital yet – I’ll just do an LLC now and convert to a C-Corp when I raise VC in a year." Ok, but in order to “convert" an LLC into a C-Corp, one actually has to go through a complete merger, whereby a new entity is created, which usually drops down a wholly owned subsidiary, that sub is merged into the LLC, leaving the LLC as the sub of the parent. In short, it’s complicated and makes the lawyers and accountants some extra cash. Yuck.
In contrast, converting an S-Corp to a C-Corp is simply a “check the box tax election" (or – actually – “unchecking the box") - this can be done in a day with a single tax form. No lawyers, no accountants, no money. Therefore, while the LLC has some benefits, the costs of converting the LLC into a fundable entity is substantially higher and usually not worth the additional effort.
Setting up the non profit...I needed to rely on some people to help me. These are folks I have a purely professional relationships with though....I figure as long as I operate professionally with my non profit...I should not have too many issues.
I am so glad you chimed in though....I am admittedly a novice at this but I just had to do something.
I am going to have a talk with my cousin...the only one I really trust. I guess even if she contributes a little...then she would get a percent and I could still set up the corp. That is unless I need more than two people.....googling that next. 
Google....the best invention since sliced bread.
Thanks so much MSW!
I'm not current on s-corps these days but two or more was the requirement a while back. I was one of those accountants billing $$$ or working in house.
I worked with a start up S-corp as a comptroller for a few years. For the first several years, 100% of capital came from family and friends. The VC's only took interest after we had over 1 million in equity. Once the VC's were in, the larger $$$ private individual investors became interested because VC backing gaves them an exit startegy.
Losses from early start up operations proveded a tax advantage as s-corp shareholders recieve a pass through of the profit and loss.
Best of luck with all of this. There are so many options in setting up and running a business. You'll get a lot of different points of view depending on different industry expierience and functional roles. I'm real exited for you.
