LLC vs. Sole Proprietorship

It’s finally that time to decide on how you want to setup your business. Maybe this is your first rodeo, or maybe you’re a seasoned “sole prop” veteran who’s wondering what the real benefits would be to starting (or transitioning to) a Limited Liability Company.

First off, let’s break down that name: What does it mean to be “Limited Liability” ?

LLC’s have one real, solid benefit: Their debt is NOT your debt

As an LLC, if you find yourself deeply in the hole – perhaps after some wise investment choices alongside some poor debt / financing choices, you can simply… Walk Away. This, in fact, is why the liability is considered “limited.”

There’s one caveat to this, however. It’s a requirement that you’ve done a somewhat decent job at separating your personal expenses / income from your business / LLC expenses and income. The reason this is important is because in the event of a bankruptcy, your business financial records become public (to the court and to your debtors).

If you run a CBD tincture LLC business, and your “business” Bank of America account is showing countless spa-days, daily purchases at Lululemon and DSW, and all of your dogwalking income as well as your (unrelated) Etsy side-hustle proceeds, it’s not going to paint a great image for the judge ruling over your bankruptcy.

The judge (at the request of the creditors) could even decide to rule that you are masking an LLC entity, and actually you are in fact running a sole-proprietorship.

This is where effective bookkeeping comes into play – It’s essential that your expenses are at least somewhat organized between your businesses, side-hustles, and personal revenue. (Pro Tip: The Tax Guru offers bookkeeping packages – and they are affordable, too!)

If you don’t see a bankruptcy in your business’s future, the limited liability may come in handy in respect to other unfortunate events. If your business causes damage to another person or to property, a sole-proprietor owner would be civilly responsible to pay damages and legal fees if found at fault.

Having an LLC can be a form of an umbrella insurance policy in this way. This won’t apply for 100% of cases: a massage therapist working under an LLC can still be personally sued if they cause bodily damage to another individual due to gross negligence.. hence… Business Insurance!

LLC’s can be SOLD and ownership is not restricted to one person

Let’s say it’s 10 years from now and your LLC business is booming, but your third child turned out to be triplets. It might be a good time to cash in on all that hard work and take an early retirement. Maybe you and the family will move to a tropical island off the coast of Belize.

Either way, an LLC is an entity that can easily be transferred or sold to another individual, or even another business. This is not possible with a Sole Proprietorship, though a Sole Proprietorship can later be transitioned into an LLC with minimal paperwork required. (You cannot convert a LLC into a Sole Proprietorship)

Taxes will be just as simple, unless you add additional owners

A single-owner LLC is treated just like a sole proprietorship for tax purposes. That means the LLC will end up on your Schedule C, and you can use TurboTax self-employed to file the return for your business.

If you do decide to add more owners to your business (at incorporation or later), neither owner will be able to file the LLC on their Schedule C. Instead, the LLC needs to file its own, separate tax return. An LLC, however, doesn’t simply file a 1040 EZ and call it a day – your accountant must file a 1065 form because the multi-owner LLC is treated as a partnership for tax purposes.

TaxACT is a great piece of software for this purpose – and, unlike TurboTax, their 1065 software can run on Mac (fancy that!). The fees for the filing are $110 plus $35 for the state return.

(Pro Tip: The state of Wyoming does not require LLCs to file (or pay) state income taxes, so incorporating in this state will save your LLC $35 a year on file fees… Also, 1065 prep is one of the services offered by this website!)

Business bank accounts require an EIN (Employer Identification Number)

An EIN is a unique identifier that will bring your business into full legitimacy, enabling you to receive business credit, to pay sales tax, and to pay W2 employees.

You can view this post for information about how to receive your EIN through the IRS.

You can run most aspects of a business without an EIN, however, so don’t feel you’re doing something wrong by not having one. In fact, you can file a self-employed Schedule C with your business name and just denote that your business is “unregistered,” and that is completely fine.

When it comes to signing up for business CREDIT, there are a couple of routes here. If you have a Sole Proprietorship, the bank may ask for your EIN, but they will only run a credit check through your personal SSN – and they will extend credit based on your personal credit history. Of course, this can be a good thing or a bad thing, depending on your personal credit history (message me to setup a credit-health session!)

With an LLC, the bank will typically want to see your EIN papers as well as your Articles of Organization (filed with the state you incorporated). This is true for business checking accounts or for credit accounts. It’s easier to open a business credit line with a bank you either have a personal history with or that you have a business checking account with. The bank may run a credit report on the LLC to extend credit, but in many cases they will also run a personal credit inquiry (if they ask you for your social security number, they will probably do this).

If your business does not have a lengthy credit history (most don’t), they might be willing to extend credit based on your personal SSN, but this isn’t a guarantee. If you desperately want to start collecting a credit history for your LLC but can’t seem to be issued credit anywhere as a business, you could try purchasing office furniture on a payment plan / credit line – this might at least get your EIN on the books with the credit agencies.

I hope you enjoyed this article: If you have any questions, you can email me:

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– Day Monet