Deciding on a business structure that is right for your entity is an essential part of establishing a new organization. It is necessary to know the difference between a sole proprietorship and a limited liability company (LLC). These business structures differ in members benefit, ownership, and taxes. This article highlights the three significant advantages of LLC owners have over sole proprietors.
- Limited Personal Liability
In a limited liability company, proprietors are not responsible for business debts, while in a sole proprietorship setting the property owners to settle the advances. If the entity is unable to pay its loans on time, lenders will go after bank accounts or properties of each owner to raise their money. By contrast, if an LLC firm runs out of finances, the individual members are not usually accountable. Also, LLC members have protection from any court case that arises against the enterprise.
It is worth noting that under certain situations, a shareholder may be responsible for the LLC debts if:
- They guarantee a loan
- The organization violate state law like failure to pay revenue or defraud consumers
- Their funds have intermingled with LLC finances
- The LLC has minimal insurance and capitalization
- More Tax Options
The Income of LLC shareholders is not taxed at the corporate level. Individual proprietors share company losses as they are directly passed to them. It allows individual members to claim the losses of a firm. The feature aids to avoid double taxing and margins to stay within an entity for future growth.
If you operate a company as a sole proprietor, the revenue department will tax you as a self-employed firm. The business law considers the enterprise income as your income for taxation purposes. A limited liability company, on the other hand, can be taxed as a corporation, partnership, or sole proprietorship. LLC owners have the power to make an election for the business to be classified as a corporation for the sake of taxation. Failure to make the request, the organization, will pay its duties as a sole proprietorship. The number of its members also determines whether it falls under sole proprietorship or an LLC.
- Ease of Ownership Transfer
Stakeholders in a limited liability company have the right to sell their shares to a third party. The ownership transfer process will not affect the business operations. However, for a sole proprietorship enterprise, the owner cannot sell their interests directly as they have to individually transfer each of its permits, assets, and licenses. Sole proprietors must produce new and valid tax identification numbers and bank accounts for the transfer.
Sole proprietorship and a limited liability company are the most popular structures for enterprises. Hawaii residents should understand their advantages and disadvantages to make an ideal decision. Remember to check out the startup and operational costs of both structures to save your money. The two must adhere to specific regulations during registration, taxation, and ownership transfer. A business lawyer will guide you on the perfect structure for your needs.