When starting a business, one of the first decisions you must make is structuring your company.
If you’re the sole proprietor, you’ll probably want to form a sole proprietorship or a single-member limited liability company (LLC). While developing a sole proprietorship is the most straightforward and cost-effective way to start a company, it may be better for you to form a sole LLC.
Compared to a sole proprietorship, the LLC offers reduced personal liability, transferable ownership, more control, more accessible access to capital, and beneficial taxation.
First, personal liability is reduced because LLC members usually are not directly responsible for the company’s debts. The members’ funds and property are not at risk if the LLC is sued, goes bankrupt, or cannot pay its debts.
However, the LLC must operate as a separate entity from the individual. Otherwise, liability is risked due to a legal term known as “piercing the corporate veil.”
Additionally, when an individual establishes and owns a sole proprietorship, the sole proprietorship will end when he dies, retires, or becomes disabled. If anyone wishes to keep the company going, they will have to file a new sole proprietorship application. On the other hand, a sole LLC allows for the transfer of the company’s ownership. When the original owner leaves the company, he may pass ownership to another person right away.
In terms of control, a single-member LLC, like a sole proprietor, has complete control over how the company is run. The member is free to make all business decisions independently and receive the entire benefit distribution. As opposed to a company, a single-member LLC does not have to negotiate with shareholders or a board of directors, so the option remains to maintain some level of autonomy.
In another aspect, only one person may own a sole proprietorship. This will make it difficult to raise money since a sole proprietorship cannot sell stocks to new buyers. The sole proprietorship is restricted to bank loans.
In contrast, the sole LLC is a corporation, and as such, it may issue shares of stock. To raise funds for expansion, the company can sell shares to new investors.
A limited liability company has the limited liability of a corporation and the tax advantages of a disregarded organization. LLCs are regulated by state law, which specifies whether single-member LLCs are permitted.
Single-member LLCs can have tax advantages and give owners a lot of power. The informality of an LLC, on the other hand, can pose challenges when it comes to obtaining credit.
A single-member LLC does not pay federal business taxes, and most states do not levy business taxes on single-member LLCs. Taxation is “passed through” with LLCs. The profits are transferred to the owners, who record the income on their tax returns, rather than the company corporation paying income tax. Since the IRS does not accept an LLC as a corporate entity, members would be taxed as sole proprietors by law.
Forming a single member company seems to offer the best benefits in terms of structure, especially when compared to just being a sole proprietor or starting a company, especially if it is just one individual at the core of the business.