If you either currently own or aspire to own a business, and you don’t plan on going into business with anyone else, you may be tempted to maintain/create a sole proprietorship structure for your company. After all, they take virtually no effort to set up, and you don’t have any reason to hash out legal details with co-owners.
However, a sole proprietorship structure may not be an approach that functions in your best interests. Forming an LLC (Limited Liability Company) may be a superior approach for a few key reasons.
Limited liability protection
One of the primary advantages of forming an LLC is the limited liability protection that this business structure provides. This means that an LLC owner’s (called a member) personal assets are generally shielded from seizure in the event that overwhelming business debts and/or legal claims arise. If an LLC business faces a lawsuit or has unpaid debts, that owner’s liability should be limited to the amount they have invested in the business. For a single-owner business, this protection can offer you greater peace of mind, as you’ll know that your personal assets are generally not at risk if something goes wrong.
Taxation flexibility
Sole proprietorship business activity – both income and losses – needs to be reported on your personal income tax return. LLCs are also taxed in this way by default. However, if you have a compelling reason to have your business taxed as an independent corporate entity, you may elect to do so during the LLC registration process.
Setting up an LLC does take more time and effort than simply commencing operations as a sole proprietor. However, this investment of energy may be well worth the benefits that it inspires.