Evaluate the Benefits of Incorporating or Forming an LLC vs. Remaining a Sole Proprietor

November 19, 2014 in ,

Chances are good that your business is currently a sole proprietorship – a little over 70% of all American businesses are. All you really need to do to start a sole proprietorship is file for any business licenses and permits that you need, register a ‘Doing Business As’ name and, if you expect to hire people, apply for an employer identification number. And bam, the business is ready to go. Along with ease of startup, sole proprietorships are easy to run – just keep all of your paperwork current, follow the law, and pay your taxes.

However, sole proprietorships have a big flaw; legally, the business and its owner are intertwined. That means that the business’s debts and obligations are also the owner’s. So if you get sued for breach of contract, or are facing bankruptcy, your personal assets could be seized to pay for the business debts. In other words, you are fully liable for your business. That can be really scary, especially considering all the sacrifices you likely made to get your business up and running. So while sole proprietorships may be easy to run, they leave you vulnerable.

That’s why we consistently recommend that new small business owners look into forming a corporation or limited liability company instead. Doing so effectively turns your business into its own, separate legal entity. That means it’s responsible for its own debts and obligations. It enters contracts, takes out loans, and holds assets. Meanwhile, your property is protected as your personal liability is reduced.

Now this protection does come at a cost. It is much more complicated, and usually more expensive, to form a corporation or LLC than it is a sole-proprietorship. Both also need to be run according to a set of rules and bylaws, which are adopted by the business, and you can lose some control over the company if you bring on new members or investors. Taxes can get a bit more complex as well, depending on the structure you choose. The laws governing these entities are simply stricter.

However, many find that the limited liability is well worth any extra work. In the end, it’s simply up to you to decide what gives you the most peace of mind. The idea to create a separate legal entity for your business may seem overkill at this stage, but trust us; you’ll appreciate the extra protection.

If you do choose to turn your business into its own entity, you next have to decide what structure fits your needs more – an LLC or a corporation.

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