Should you start a sole proprietorship or LLC?

As an entrepreneur, you may be wondering what business entity you should form. The company type you choose will affect how you will pay business taxes and how much personal liability you will risk. If you are starting out on your own, you may be trying to decide between starting a sole proprietorship or limited liability company.  

There are benefits and drawbacks to each of these entities. Here are the pros and cons of operating an LLC versus a sole proprietorship.

Business taxation

While starting a business is exciting, you need to consider how the IRS will treat it when it comes to taxes. If you become a sole proprietor, the IRS will consider your business income your personal income. You will also need to make quarterly self-employment taxes. 

If you launch a single-member LLC, you can choose how you want the IRS to treat your company. By default, taxation will be the same as a sole proprietorship. However, you may elect for the IRS to tax your business as a corporation. How you choose to be taxed as an LLC will depend on the details of your circumstances and the scope of your enterprise. 

Personal liability

As a sole proprietorship, you and your business are essentially one and the same when it comes to liability. This means you are personally responsible for any of the legal liabilities and debts of your business. If you are a sole proprietor, your home, bank accounts and other personal assets may be at risk if your business has unpaid debts or lawsuits. 

One of the main benefits of creating an LLC is the fact it is a completely separate legal entity from you. This means your assets will not be at risk in the same way they would be in a sole proprietorship. If you want your company to be legally distinct from you, consider going with an LLC. 

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