Sole Proprietorship or LLC?
Small businesses are faced with many challenges as they grow their brand and customer base. The biggest decision in previous years was whether a company should be incorporated or not. However, business owners have many other choices today in regards to their company’s structure. Debating the advantages and drawbacks of a sole proprietorship and limited liability company is a common conversation among professionals. Discover the details behind these designations, and you’ll be able to run your business as smoothly as possible.
The Cost Factor
Forming an LLC takes a considerable investment because certain fees must be paid to the state. Formation and filing fees are common among all of the states. You’ll need to present paperwork that explains the nature of your company and who actively owns it. In most cases, you’ll work with the state legislature on the formation documents. The state fees that will be annual costs are also due at this time. Be aware that each state has its own costs. Many savvy entrepreneurs bypass their resident state and form the LLC in another region. There are some extra costs to this process, but they may be lower than the annual state fees.
In contrast to an LLC, a sole proprietorship doesn’t have any fees to file. You simply start your business and account for all monies being moved around. The ease with which you can start your company as a proprietor is the main reason why many people choose this designation.
A sole proprietor may not have all of the upfront costs of an LLC, but there is a major drawback that must be addressed. This proprietor offers his or her services based on schooling, experience and research. However, mistakes and oversights can occur to any professional. If the proprietor is sued, the financial burden is placed on the owner’s personal funds. The lawsuit can take away a home, vehicle or other high-end items. One lawsuit alone can render a proprietor bankrupt.
An LLC has legal protection with its designation. Lawsuits may still occur, but the only finances that can be touched are the company’s funds. LLC owners and members are entirely protected from any personal financial downfall.
Consumers are smarter than ever before with the Internet at the tips of their fingers most of the day. People will research a company before they even call for a product or service. Forming an LLC, as an example, tells potential clients that the business is legitimate. Because legal documents and filing are involved, consumers perceive an LLC as more professional than a proprietorship. Sole proprietors use their reputations to build a customer base, but word-of-mouth can only go so far. Reputation strength is usually on the side of the LLC designation.
Pooling Financial Resources
Sole proprietors can only lean on themselves for financial support. These funds might come from personal savings accounts, loved ones or financial loans. If a monetary issue arises, the proprietor is bound to fix it or the company loses ground.
An LLC has the ability to pool resources from various members and industry contacts. This money is collectively invested in the company with everyone benefiting in the end. If a company works in a volatile industry, an LLC is usually a smart avenue to take so that any problems can be worked out with ease.
Managing the Day-to-Day
A major drawback to an LLC is the management style. There’s usually more than one manager or owner who wants to have his or her voice heard. Managing company priorities will usually take more time with meetings and agreements involved at each step. In stark contrast, a sole proprietor answers the problem on his or her own. A challenge arises, and the proprietor repairs the situation as best as possible. Company management is usually easier with a sole proprietorship.
Make a mental note that each state has varying laws regarding each business designation. If you want to dig deeper into local proprietorship or LLC laws, contact an experienced attorney. These highly skilled individuals can discuss your particular situation as they come up with the best solution. In the end, you simply want to protect yourself and the business from any harm by designating it in the proper manner.
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