Choosing a Business Structure: Sole Proprietorship vs. LLC

When starting a business, one of the most important decisions you have to make relates to the business structure. Choosing a structure that fits your idea the best will make it easy to set up and run your business. For startups and small businesses, the most common structures are sole proprietorship and Limited Liability Company (LLC).

Here are some key differences to know in order to make a smart decision. 

Forming formalities and management structure

The process of forming a sole proprietorship is quite straightforward. You need to choose and register your original business name, and then obtain the necessary licenses and permits. A sole proprietorship is a single unit of business, owned and run by one person. 

To form an LLC, one or more members need to register in line with the state regulations. This process is a little more involving, and entails steps like filing a certificate of formation, drawing up an operating agreement and paying the required filing fees.  An LLC is a separate and distinct legal entity run by members of the company. 
Ease of raising money 

The owner does not bear any cost when forming a sole proprietorship. As such, the entity may have low credibility, making it difficult for sole proprietors to obtain debt financing. In most cases, you will have to depend on your personal credit history and business assets to raise funds to start and run the business.

When looking for money to finance their operations and expansion, an LLC can raise capital by offering ownership interest to investors. 
Personal liability 

A sole proprietor is liable for the entire business and does not enjoy liability protection. The owner is held personally liable for lawsuits, business debts and other business-related obligations. Both business and personal assets can be seized to satisfy the outstanding obligations in case of a lawsuit. 

For an LLC, the liability of members is limited to their investment in the company. In the event that the company incurs debts or fails, creditors can only go after the business assets and not members' personal assets.  
Tax implications 

Although LLCs and sole proprietorships are taxed in the same way, the former enjoy the flexibility of choosing their tax status. Limited liability companies can choose to be taxed either as a sole proprietorship, partnership or corporation. 
Existence and lifespan

A sole proprietorship will cease to exist when the owner sells the business, retires or dies. On the other hand, an LLC has perpetual existence unless it is dissolved by the owners or according to the law. 
Which is better? 

Each of these two business structures has its advantages and disadvantages. The choice you make will depend on your situation. However, some critical factors you should be mindful of are start-up costs, liability protection, taxes and the impact of government regulation on your business. 

It takes a lot of work, dedication and resources to get a new business up and running. At Broadway Suites, we support small and growing businesses by providing affordable, all-inclusive offices and amenities. You can also use the in-house accountancy firm at Broadway Suites to ensure proper management of your financial resources. Contact us today to learn more and rent shared NYC workspace from us.