LLC vs Sole Proprietorship vs Corporation

LLC vs Sole Proprietorship vs Corporation

**Short Answer: LLCs are the best business structure for the majority of entrepreneurs. Sole Proprietorships offer no protection whatsoever. Corporations are complex and subject to double taxation. See the details below.**


Video Transcript:

In this video, I’m going to tell you why LLCs are the best structure for the majority of entrepreneurs, why sole proprietorships offer no protection whatsoever, and why corporations are complex and subject to double taxation. What exactly is an LLC? An LLC is a Limited Liability Company. It’s a legal entity also known as a business structure and it can be used to run a business, or it can be used to hold assets such as real estate, boats, or aircraft. The owners of an LLC are called members. An LLC can be owned by 1 person called a Single Member LLC, or an LLC can be owned by 2 or more people called a Multi-member LLC. An LLC is a business structure, designed specifically to protect your personal assets from the liabilities of the business. What is a corporation? A corporation is also a legal entity and it is most often used to run a large company with shareholders and investors. The owners of a corporation are called shareholders. After you form a corporation, you must also elect a board of directors to oversee the company and you must elect corporate officers to execute and run the day-to-day business. Corporations are what we typically think of when we hear Microsoft, Apple, IBM, McDonald’s, et cetera. What is a sole proprietorship? A sole proprietorship is when a person does not form a business entity and they operate their business as themselves. In the eyes of the law, you are your business in a sole proprietorship. This is a very risky setup because if your business is sued then you are personally responsible for all of the debts and the liabilities. This means that your personal assets like your home, your cars, and your bank accounts are at risk of being used to cover those debts and liabilities. We’ll save you some time right off the bat. A sole proprietorship is a bad idea. A sole proprietorship offers you no protection whatsoever. A sole proprietorship is typically set up when someone is unaware of the options that they have when it comes to setting up their business structure. In essence, a sole proprietorship is not protecting anything, not you and not your personal assets. What about a corporation? In short, a corporation is not a bad business entity but they are not for everyone. They are best suited for companies that want to go public on the stock market via an IPO, an Initial Public Offering. Again, think Google, IBM, Microsoft, et cetera, or corporations are best suited for companies that need to raise large amounts of money. Additionally, corporations are required to hold annual meetings, record all meeting notes and issue shares to the stockholders. Since most entrepreneurs just want to get their business off the ground, a corporation is usually not the best bet as it will be too complex and costly to maintain, so that brings us back to the LLC. An LLC is a hybrid between a corporation and a sole proprietorship. It harnesses the advantages of both while leaving behind their disadvantages. Let me explain. The disadvantage of a corporation is what’s called double taxation. The corporation must pay taxes at the federal level and then the owners must pay taxes again on their dividends, on their individual tax returns. Corporations, again, they’re also tedious and expensive to set up. You’ll need to create a board of directors, issue shares, as well as elect corporate officers. The advantage, however, of a corporation is liability protection. The owners are protected from the debts and liabilities of the business. The disadvantage of a sole proprietorship is unlimited liability. This means the owner is completely responsible for all of the debts and liabilities of the business. The advantage of a sole proprietorship is what’s called pass-through taxation. Sole proprietorship income pass this through right to the owner’s individual tax return. This means no corporate tax return and no double taxation. Sole proprietorships are also a lot easier to set up and they have flexible management. You’re not required to hold meetings, elect corporate officers, or issue shares of stock, so back to the LLC, it’s the best of both worlds. LLCs provide liability protection. Your personal assets are protected against creditors. LLCs offer pass-through taxation and may avoid the dreaded double taxation. Again, the LLC harnesses the advantages of both corporation and the sole proprietorship while leaving behind their disadvantages. LLCs were adopted by state law and all 50 states nearly 30 years ago to entice more small business growth. LLCs are the most popular and the most flexible business structure for entrepreneurs, business owners and real estate investors.

Have you ever asked yourself which business structure is the best for you?

A Sole Proprietorship?

A Limited Liability Company (LLC)?

Or how about a Corporation?

What is an LLC?

An LLC is a Limited Liability Company. It is a legal entity (business structure) and it can be used to run a business, or it can be used to hold assets (such as real estate, boats or aircraft for example).

The owners of an LLC are called “members”. An LLC can be owned by one person (called a “Single-Member LLC”) or an LLC can be owned by two or more people (called a “Multi-Member LLC”).

An LLC is a business structure designed specifically to protect your personal assets from the liabilities of the business.

What is a Corporation?

A Corporation is also a legal entity (business structure) and it is most often used to run a large company with shareholders and investors (they are not ideal for owning real estate).

The owners of a Corporation are called “shareholders”. After you form a Corporation, you must elect a Board of Directors (to oversee the company) and you must elect Corporate Officers (to execute and run the day-to-day business).

Corporations are what we typically think of when we hear Microsoft, Apple, IBM, McDonalds, etc.

What is a Sole Proprietorship?

A Sole Proprietorship is when a person does not form a business entity and they operate their business as themselves.

In the eyes of the law, you ARE your business.

This is a very risky structure because if your business is sued, then you are personally responsible for all debts and liabilities.

This means that your personal assets (home, cars, bank accounts) are at risk of being used to cover those debts and liabilities.

A Sole Proprietorship offers you no protection whatsoever.

We’ll save you some time right off the bat… a Sole Proprietorship = a bad idea.

“Okay, sounds good. But which is the best for me?”

Good question.

As we said, a Sole Proprietorship offers you no protection whatsoever.

A Sole Proprietorship is typically setup when someone is unaware of the options they have when it comes to setting up their business structure.

In essence – this structure is not protecting anything. Not you. And not your assets.

Maybe a Corporation would be the better option for you?

In short, Corporations are not a “bad” business entity… but they are not for everyone.

They are best suited for companies that want to go public via an IPO, an initial public offering on the stock market (again, think Google or Microsoft).

Corporations are best suited for companies that need to raise large amounts of money.

Corporations are also required to hold annual meetings, record all meeting notes, and issue shares to the stockholders.

Since most entrepreneurs just want to get their business off the ground, a Corporation is usually not the best bet as it will be too complex and costly to maintain.

LLC Advantages

An LLC is a “hybrid” between a Corporation and a Sole Proprietorship.

It harnesses the advantages of both while leaving behind their disadvantages.

Let me explain.

The disadvantage of a Corporation is what’s called “double taxation”. The Corporation must pay taxes at the federal level, and then the owners must pay taxes again on their dividends (on their personal income tax returns).

Corporations are also tedious and expensive to setup.

Again, you’ll need to create a board of directors, corporate officers, and you’ll need to issue stock to the shareholders.

The advantage of a Corporation is liability protection. The owners are protected from the debts and liabilities of the business.

The disadvantage of a Sole Proprietorship is unlimited liability. This means the owner is completely responsible for all debts and liabilities of the business.

The advantage of a Sole Proprietorship is what’s called “pass through taxation”. Sole Proprietorship income “passes through” right to the owner’s individual tax return. This means no corporate tax return and no double taxation!

Sole Proprietorships are also a lot easier to setup and they offer flexible management (you’re not required to hold meetings, elect corporate officers, or issue shares of stock).

LLCs = Best of Both Worlds

LLCs provide liability protection (your personal assets are protected against creditors) and LLCs offer pass-through taxation (avoid the dreaded double taxation).

LLCs were adopted by state law in all 50 states nearly 30 years ago to entice more small business growth.

LLCs are the most popular and the most flexible business structure for business owners, entrepreneurs and real estate investors.

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Matt Horwitz
Founder & Educator at LLC University

Forming an LLC shouldn’t be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! We teach people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your entrepreneurial journey.


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6 Comments

  1. mary September 13, 2017

    Do you have an operating agreement for manager-managed that you can email me?

    reply
    • Matt Horwitz September 13, 2017

      Yes we do :) I just emailed it to you.

      reply
  2. sabrina October 8, 2017

    I noticed that you don’t speak of a /s corporation. This entty is very important to let your readers know about.

    reply
    • Matt Horwitz October 8, 2017

      Hey Sabrina, great comment. We figured throwing S-Corp into the conversation too early could be a bit confusing for a lot of people starting out. Plus, most people form an LLC and then have it taxed as an S-Corp later on… so we decided to write about S-Corp separately. You can see the article here if it’s helpful: LLC taxed as S-Corp. Thanks again for your comment!

      reply
  3. Buzzed Aldrin November 5, 2017

    Thanks for this great site! Clear and succinct, straight-talking info.

    Question: Re the liability of a sole proprietor, what if it’s highly unlikely that the business would ever be sued?

    In my case, the business is just an e-newsletter, and I think the following points are significant:

    1) The newsletter contains only technical information — It provides no advice, suggestions, or guidance on how to do anything.

    2) It contains a disclaimer absolving the publisher (me) of any responsibility for errors, omissions, etc.

    3) Subscribers are corporate professionals who are aware of the above two points, and aren’t motivated to “blame the messenger” anyway.

    4) The only interfacing I have with others is transmitting the newsletter to readers, and billing their employer. All other activities involve no one, i.e. no clients or suppliers visit me which could otherwise lead to liability scenarios.

    5) I presume an LLC would not protect personal assets in cases involving criminal business activity.

    That said, I don’t feel at risk as a sole proprietor. Since I have the pass-through benefit of an LLC or S-corp without the filing and paperwork issues, is there a downside to my arrangement?

    Thanks for any comments!

    reply
    • Matt Horwitz November 8, 2017

      Good points you’ve made, but still, there are dozens of other reasons one could be sued that you did not mention. We cannot get into legal advice, but this conversation (regarding your exposure to liability) should be carried out with an attorney. Apologies I couldn’t get more into this with you.

      reply

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