Did you know that 1.35 million new business applications were made in the first quarter of 2021 alone in the US alone? This is a big jump compared to just 837K in the first quarter of 2020.

This sudden increase in the number of new business applications points to the fact that more people are trying out entrepreneurship. If you’re an entrepreneur in the making, you already likely have a lot on your plate.

After all, you’ll have to:

  • Arrange funding for the business
  • Find employees
  • Look for an office space
  • Develop a business plan
  • Work on your marketing

The list goes on and one of the main parts of it is also that of choosing a reliable business structure. Without the right business structure, you’ll likely face some issues while running your business.

So, when you’re faced with the decision of choosing between Sole Proprietorships and LLCs, you may need to put in a lot of thought. To make things easier for you, we’ve put together this guide highlighting their similarities and differences.

Business Ownership Structure

The corporate structure that you select dictates the business ownership as well. A Sole Proprietorship, as the name suggests, can only have a single owner. There’s no possibility for a partnership arrangement in this structure.

But this isn’t the case with LLCs.

In the case of LLCs, you can have one or more owners (called members). Additionally, these members don’t need to be individuals, as is the case with Sole Proprietorships. Instead, they can be other LLCs and foreign firms too.

How the Business Gets Taxed

Taxation is an important consideration that you should be making when you’re forming a business. The structure you choose will dictate the different types of taxes that the business will be subject to.

For example, Sole Proprietorships and LLCs both offer the pass-through taxation feature to avoid double taxation. This means that the income of the business flows through to the owners’ personal income.

However, you would be required to pay self-employment tax for both of these. While there’s no way of avoiding this tax in Sole Proprietorships, you can do so in LLCs.

For that, you can choose to get the LLC taxed as an S-Corp. This would treat all the members as employees and thus there’s no self-employment tax to be paid. However, you would be required to pay corporate tax for the business.

Starting Your Business

The structure you choose also influences the number of steps that you need to take to start the business. The steps required are few for Sole Proprietorships and you can start running the business under your name with ease.

However, for LLCs, the process is slightly more complicated and expensive. You have to:

  • Pay the state filing fee
  • Prepare an LLC Operating Agreement
  • File your Articles of Organization

But the learning doesn’t stop here. There’s a lot more that you must know about Sole Proprietorships and LLCs before you choose one. To compare them further, check out this infographic created by GovDocFiling.

About the author

Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.