Sole Proprietorship vs. LLC: How Are They Different?

Are you thinking of starting a new business? 

If yes, then you need to determine the entity structure of your business right at the outset. 

You have four business structures to choose from—Corporation, Limited Liability Company (LLC), Partnership, and Sole Proprietorship. 

Out of these four, LLCs and Sole Proprietorships are arguably the most popular among new entrepreneurs, owing to their ease of formation and taxation benefits. 

There are, however, key differences between the two structures that you need to consider before choosing one of them for your business.

Let’s discuss them in detail.

Difference #1: Process and Cost of Formation

Forming a Sole Proprietorship is simple. You can simply start the business under your own name or apply for a fictitious name. 

In the first case, you can straightaway file for registration with the Secretary of State. In the second case, you will need to file for a DBA or Doing Business As, along with a filing fee.

Forming an LLC is relatively complex. You will have to create Articles of Organization and an LLC operating Agreement, outlining the structure, ownership, and financial plans of your business. 

Using these documents, you can file with the Secretary of State with a state filing fee that varies from state to state. On top of that, you may need to pay an annual filing fee in some states.

Difference #2: Ownership

A Sole Proprietorship can be owned only by an individual. An LLC, on the other hand, can be owned by a group of people or companies who are called “Members.” 

Members of an LLC can be individuals, other LLCs, foreign entities, consultants, or basically anyone, except insurance companies and banks. 

Difference #3: Personal Liability Protection

In a Sole Proprietorship, all of the business loans and lawsuits flow to the business owner. In an LLC, members are not personally responsible for business liabilities. In this respect,  LLCs offer personal liability protection to their owners. You can learn more about the differences between having sole proprietary or being a sole trader and owning a company with LegalVision.

Need More Information?

While we have covered three of the main differences between a Sole Proprietorship and an LLC, there is more to this topic than meets the eye. 

To get the full load of information, you can read this infographic by GovDocFiling.