Many new entrepreneurs tend to get stuck in the Sole Proprietorship vs. LLC dilemma and for good reason—it is a tough choice to make.
Both Sole Proprietorships and LLCs are great options to start a small business and both have their own set of advantages and disadvantages. What you need to ask yourself is this: which of these best suits my requirements?
Instead of listing the pros and cons of each of these business structures, this post will help you choose the right option based on your priorities.
Let’s get started.
How to Choose Between Sole Proprietorships and. LLCs Based on Your Needs
Here, we will list a few common criteria that people consider when choosing the right business structure. Assess what requirements you relate to and then make the choice between Sole Proprietorship vs. LLC.
Here you go.
What Level of Control do You Want?
The first thing that you should ask yourself is how much control do you want over your business.
If you want total control over all aspects of your business, then Sole Proprietorship is the way to go. You will be the sole owner of your business and make all strategic business decisions. It will also mean that you will have more responsibilities and complete liability for your business.
If you are, however, willing to share control and add on more partners, then LLCs are the better choice. In an LLC, the profits, losses, responsibilities, and liabilities are shared between the members of the LLC. You will also have to consider other members’ opinions before making any big decisions.
How Do You Want to Be Taxed?
Another important distinction between a Sole Proprietorship and an LLC is the way they are taxed.
If you want to be taxed on your personal income and not pay any separate corporate tax, then you can choose either of these. Do remember that you will have to pay a self-employment tax in this scenario.
On the other hand, if you want to be taxed like a Corporation, then LLC is a better option for you. In this case, you will be treated as an employee and be taxed on your salary. You will also pay a separate corporate tax.
Do You Need External Funding?
Last, but not least, you should consider your funding options.
If you have a line of credit or your personal savings, then you can start a Sole Proprietorship. If you want external funding from investors, then LLC is the better option as it is difficult to secure funding for Sole Proprietorships.
Ready to choose between a Sole Proprietorship and an LLC?
Before you make that decision, check out the detailed differences between the two business structures listed in this infographic by GovDocFiling.