Discussing the difference between a sole proprietorship and an LLC brings us to the sharp outlook on what limited liability company actually entails. A limited liability company is the United States-specific form of a private limited company.
It can be referred to as a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. It is however not a corporation under state law but a legal form of a company that provides limited liability to its owners in many jurisdictions.
There is no doubt about the fact that it is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). You can also say it is a type of unincorporated association, distinct from a corporation.
The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. As a business entity, an LLC is often more flexible than a corporation and may be well-suited for companies with a single owner
Limited liability companies are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership, and, under certain circumstances, LLCs may be organized as not-for-profit.
Also. in some states around the world, businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a similar entity called a professional limited liability company (PLLC).
Read Also: Benefits of Sole Proprietorship in Canada
Having intimated you with what an LLC is, it is certain that you have wondering what difference exactly distinguishes each of this terms from the other. Well, in this content, you deserve to know that there is a, if not many, difference between a sole proprietorship and an LLC. Check the info provided below:
Ownership Opportunities
Conceptually, sole proprietors have full control over the business, including how the company uses its proceeds. In a sole proprietorship, there are no other businesses or individuals to share business ideas with. The sole proprietor alone will have to make every decision regarding how to operate the company, and use the company’s resources.
LLCs with more than one owner have other members and managers to provide input regarding how to manage the business. In addition, owners of an LLC can choose to hire outside individuals to manage the company, as opposed to handling the company’s day-to-day affairs.
Credit and Loans
If your business has overhead that you need to pay for with a line of credit or a loan, an LLC will be more credible and less risky to a lender than a sole proprietorship. The LLC can sometimes offer an ownership interest in the business as collateral, in exchange for financing. A sole proprietor cannot offer ownership of the business to another person or entity because it would no longer be a sole proprietorship.
Business Status
A sole proprietorship will typically cease to exist if the owner decides to sell the business, or if they pass away before doing so. An LLC can continue with an operating agreement to protect the assets of the business.
Raising Capital
Sole proprietorships have more difficulty raising money than an LLC. For starters, a sole proprietorship may be viewed as having less credibility, since the business owner did not take the time or pay the expense to incorporate or form an LLC. Lack of credibility makes it harder for a sole proprietorship to get loans, and could force the business owner to rely on business assets and personal credit history to raise funds for the business.
LLCs may offer ownership interest in the business in exchange for money which will help finance the company’s expansion. When a sole proprietor offers ownership in the business to another business or person, the company will no longer be treated as a sole proprietorship.
Tax Payment
For tax purposes, a single-member LLC and a sole proprietorship both pay their taxes as pass-through entities, with the owner reporting their business income on a Schedule C form with their tax return. The proprietor can deduct allowable business expenses from this form. These tax benefits would be deducted from the owner’s net income, which is taxed at the owner’s personal income tax rate.
An LLC with one owner would be taxed the same as a sole proprietorship. If an LLC has more than one owner, the LLC must file a business tax return with the IRS and will likely have to file one with their state tax authority. Each owner will have to report their own share of business income from the LLC by attaching a Schedule K-1 form to their personal income tax returns.
Lasting Business Legacy
An LLC may exist forever, regardless of who the manager or members of the company are. A sole proprietorship will cease to exist when a business owner dies, retires or decides to sell the business. LLCs may have an operating agreement that indicates provisions for continuing the company in the event of a member’s death, withdrawal or retirement.
