LLC vs Sole Proprietorship: Which is right for you in 2024?

if you're thinking about or planning on starting your own business you may be wondering or planning on forming an LLC for that new business you may be wondering do I need to form an LLC is it really going to be beneficial for me are there any drawbacks to forming an LLC if that's you you have come to the right place in this video I am going to talk about sole proprietorships versus llc's what each one means what's the difference the pros and conss of each and a few things to consider if you're kind of still on the fence before we get into all of that though hello I'm attorney Aiden Durham with 180 Loco in Colorado and this is allab in your business while I am a lawyer I am not your lawyer the stuff I talk about in this video is not a substitute for actual legal advice if you need help with any legal situation you should consult with a lawyer let's kick things off with just some of the basics what is a soulle proprietor ship ail proprietorship is the simplest form of business ownership it is one person doing business it's a pretty common go-to business structure for anyone that's working for themselves freelancing operating a small operation the equivalent to a soulle proprietorship when there's more than one person is a partnership it's generally the same idea Soul proprietorship is one person doing business a partnership is two or more person doing business what are some of the pros the benefits of operating as a sole proprietorship the biggest one is it's easy to set up you don't really need to do anything you don't have to file any paperwork with the secretary of state to form a soulle proprietorship you just kind of do it this is a little a little caveat to that you may still have to file a DBA or a trade name if you're not going to be operating the business under your legal name if you're going to have some kind of a trade name if you want to operate under some different name then you'll likely most states require that you register that DBA or that trade name with the state but so proprietorships don't really have much like ongoing obligation compliance stuff not much you have to worry about you don't have to file annual reports or regular reports anything like that you still have to comply with whatever other uh regulations or laws might apply to a business in general like maybe a business license or a business permit but the actual setup and formation of a sole proprietorship is easy because there is none you just do it and so this is going to save in time and money because you won't have filing fees as the sole owner of the sole proprietor you are in full control you make all the decisions and then taxes and tax filings are relatively simple for sole proprietorships as well your profits and losses are reported on your person personal income taxes your personal income tax returns it's a Schedule C to your personal Returns what are the cons or the drawbacks of a so proprietorship the biggest one has to do with liability the sole proprietor is completely 100% liable and responsible for any debts liabilities or other obligations of the business if the business is sued it is you being sued and you're on the hook for any of that it may also be more difficult to raise Capital as a soulle proprietor this isn't always the case but Banks and investors are generally less inclined to loan or invest in sole proprietorships not always the case but it may be more difficult to find investors or get loans or other funding as a sole proprietor all right that's the sole proprietorship let's move on to an LLC what is an LLC LLC stands for limited liability company it's kind of like a hybrid mix of a corporation and a partnership or a sole proprietorship you get some of the benefits that you might get as a corporation but some of the ease and simplicity that comes along with a so proprietorship one of the biggest pros and advantages of operating as an LLC is that LL part that limited liability the owners of the LLC who are called the members the llc's members are not personally responsible ible for the debts and liabilities of the LLC if the LLC is sued compared to the sole proprietorship when I said the sole proprietorship is sued that's you being sued with an LLC that's not the case if the LLC is being sued it's the LLC that's on the hook and you as a member your personal assets are generally speaking protected from those liabilities if you're going to be operating as a single member LLC meaning there's just one owner one member then same with the sole proprietorship you as the single member are fully in control of the business you are the decision maker compared to a corporation though which also gives you that liability protection compared to a corporation llc's have generally a lot more flexibility in how they are structured and how they're managed on the tax side llc's are a lot like sole proprietorships as well or Partnerships but you also get some more choices with respect to taxes an LLC by default is taxed as a pass through entity the IRS kind of treats it like the LLC doesn't exist so in that instance the LLC is taxed almost exactly like a soulle proprietorship is you still report your profits and losses on that schedule C on your personal taxes but unlike a sole proprietorship an LLC can choose to be taxed in a different way way like a corporation an LLC can elect to be taxed as an es Corp or a C corporation and making one of those tax elections can potentially save you a good deal on taxes what are some of the cons or the drawbacks of the LLC uh again obviously I'd hope the probably one of the biggest cons is going to be the cost and steps involved in setting up the LLC you have to file a document with the secretary of state to get the LLC registered usually that's going to have a filing fee associated with it you might have some annual or ongoing filing obligations again usually those are going to have some filing fees associated with them as well there's generally just more paperwork that you have to deal with if you're forming and operating as an LLC you're also going to have more obligations more things you have to deal with this is especially true now in 2024 with the recent uh introduction of the corporate transparency Act which requires reporting companies to submit a Boi or beneficial ownership information report to finen a federal government agency soul proprietorships and Partnerships don't have this requirement they aren't considered reporting entities llc's not all of them there are some um exclusions and exceptions but the overwhelming majority of you who are watching this video are going to have to comply with the corporate transparency act and file that Boi report and then kind of along that same thought process as an LLC there are more things you have to do to benefit from that limited liability that the LLC gives you you don't just form an LLC and then that's it your job's done I'm protected from all liability you have to operate the business as a separate being a separate and distinct thing from you if you want to benefit from it being treated as a separate and distinct thing from you uh the easiest example of this is having a separate bank account for the LLC it's always it's still a good idea for so proprietorships to have a separate business bank account for the sole proprietorship for you know just kind of accounting purposes but for an LLC it's even more important because the funds of the LLC need to be separate from our individual funds as the member so if we want to be able to benefit from and take advantage of that limited liability that liability protection that the LLC gives us we are going to have to follow more formalities than we will if we're operating as a sole proprietorship so if you are trying to decide which one do I go with should I be a sole proprietor or should I operate as an LLC what are some things you should think about number one risk uh involved with your business and your general risk tolerance if your business your industry involves substantial risk if it is highly litigious if people get sued a lot in your business then an LLC is probably going to benefit you it's going to give you some peace of mind and comfort knowing that your liability as an individual as the member is going to be protected from the liability and the debts of the LLC you should also consider your own risk tolerance are you comfortable with accepting even a minimal amount of risk even if you're in a relatively less risky industry if it's pretty unlikely that someone's going to sue you maybe you still don't even like the idea that someone could sue you if you are super risk averse then the LLC may still be a good idea for you you should also consider your investment needs if you're going to be looking for investors or trying to get a loan or raising Capital like I said sometimes that's harder to do as a sole proprietor an LLC operating as an LLC might make it easier to attract investors if that's not the case though if you are doing all this on your own you don't need money from anybody else and the risk isn't an issue for you then s proprietor might just be a fine choice and finally consider your tax preferences like I mentioned kind of by default an LLC a single member LLC and a sole proprietor are taxed in the exact same way same goes for a LLC that has multiple members and a general partner ship tax in the same way but the LLC has the ability to make those tax elections either as an es Corp or a C Corp and potentially save on taxes that way so if you want to keep things just very simple if you have no desire and don't plan on making an s or C Corp election you want to keep things simple then that might be a reason to just go with a sole proprietor ship but if you're looking for ways that you can save on taxes and particularly self-employment taxes then an LLC might be a better option remember that no two businesses are the same and needs can change as the business grows you can start off as a sole proprietor and then form an LLC later on if needed but always consult with a lawyer and a financial or Tax Advisor before making any big decisions with your business and if you're still unsure should I do s proprietorship should I do LLC of course consult with a lawyer that's all for this episode folks if you learned a thing or two give me a thumbs up like this video subscribe if you haven't already click that little bell so you get notified anytime I post a new video and you can check uh the description for links to additional information and resources if you decided or you're pretty sure you're going to go the LLC route I've got another great video that can help you with doing that I will put it right here you can click right there to check that out and I'll meet you over there thank you so much for watching I'm Aiden Durham and I'll see you next time

Channel: All Up In Yo' Business with Attorney Aiden Durham

Views: 3,412

Keywords: all up in yo business, 180 law co, aiden durham, llc, sole proprietorship, llc vs sole proprietor, llc vs sole proprietorship, sole proprietorship vs llc, limited liability company, small business, single member llc taxes, sole proprietorship business, what is an llc, sole proprietorship taxes, sole proprietorship advantages, should i form an llc, sole proprietor, what is a sole proprietorship, how to start a sole proprietorship, sole proprietor vs llc, single member llc

Id: JXmPrA-PQmc

Length: 12min 2sec (722 seconds)

Published: Wed Mar 20 2024