Which Legal Entity is Best for Your Local Small Business?
Sole Proprietor vs LLC
Listen to the Podcast Episode Below or Feel Free to Read Below:
One of the big questions new local small business owners will have is whether or not they should be a sole proprietor or should they form an LLC. If they don’t have this question, then they need to. Let’s take a look at each option. This choice is important to you and your new local small business so you will want to educate yourself.
I’m sure you have heard the terms “sole proprietor” and “LLC – Limited Liability Company”. Just in case, simply put, they are the legal entity that you run your business under. A third less common term you have probably heard of is a “corporation”. Larger business such as Walmart, Home Depot and Coca Cola are all examples of corporations. Since the vast majority of you are going to run much smaller businesses we will focus on a Sole Proprietor vs a LLC as you will not need to form a corporation.
Sole Proprietor | DBA – “doing business as”
A large group of local small business owners choose to run their business with no legal entity, they do it just as themselves. Normally they come up with some business name they like, create some business cards and start helping people. So is there a problem with this? Well, Yes and No.
Technically when someone does this, they are what is called a sole proprietor and they are doing business as the name of the company they created. So by default they have chosen which entity they are. While there may not be a problem doing this, you will want to make sure if you choose to use a company name, you need to follow your state laws.
“DBA – Doing Business As” will have different requirement by state. Some states require you to file and record this name with the appropriate government group. In others, you don’t need to file with the state. But a word of caution, you will want to make sure that you check that the name is ok for you to use. I’m pretty sure there are already a few Bob’s Plumbing around so be unique but make sure folks know what you do.
By checking with your state or county, you ensure that no one else is doing business under your name or your business name. You then take the paperwork to the bank to open up a bank account. So it is important that you protect your name.
Shortly we will discuss the advantages between the sole proprietor and our next entity, the LLC.
LLC – Limited Liability Company
Our next entity is the LLC – Limited Liability Company. An LLC is where you create an official company that is filed with your state. With a LLC you will pick a company name and you need to check your state’s site to ensure no one else is using that name. Make sure you check the name availability page before submitting any paperwork. This will save you time on any rejections due to name clashing.
Where a sole proprietor is doing business as themselves or as a dba , a LLC is doing business as an official company. You will open up your accounts not as yourself but as this company. It is important that you always remember this when conducting business.
Pros & Cons of a Sole Proprietor vs an LLC
One of the biggest pros of a LLC over a sole proprietor is from a liability standpoint. As a sole proprietor you will be personally liable for the debts incurred by the business. They can come after the money by coming after your home, car or other personal property. As an LLC it does offer some protection. They can typically only come after the assets of the company and not you personally. However, if you sign a personal guarantee, then the creditors can still come after your personal assets.
From a tax stand point, a sole proprietor will be taxed based off their personal income tax. There is a schedule that you will capture your business income and expenses. So there is no need for doing two sets of taxes. Taxes as an LLC depend on if you are a single person LLC or have partners. As a single personal LLC (like I have been) your business files taxes with yours so you are still doing one return. However, if you are a multi-person LLC you will have a separate return that splits the taxes between the owners based off how you have set your company up.
Remember, whichever route you go, please keep great records of both income and expenses. You can choose to use a CPA, an accountant or file on your own. I personally am a big fan of Turbo Tax and use their small business version. I love it and have used it for almost 10 years. It is easy to use and walks you through each step. It has covered me for my various businesses including my single person LLCs.
Which One is Right for Your Business?
I’d love to tell you which is best for you but as you can see it really comes down to preference and any concerns you might have. What matters most to you? If your business has a huge liability potential (for example hurting others or yourself) then you might consider an LLC. If you have assets you want to protect, then an LLC might also be best.
If you don’t have these concerns, then you can always start as a sole proprietor but you can always switch down the road.
If you are part of a franchise, odds are they will want you to form an LLC.
I know when I started my first small business, I was told by the franchise I needed an LLC stat. I had no clue how to do this and turned to Legal Zoom and they were awesome at helping me out.
Later I learned the process wasn’t too hard and since then I have formed my own now that I’m a bit more educated. But don’t fear, if you would rather have someone else do it, I highly recommend Legal Zoom. I was very pleased with my experience. They assign you to a local lawyer who takes care of all the paperwork filing and newspaper submissions. They even take care of the statutory agent (who your legal contact will be) for you.
Once again, congrats on your decision to start a local small business! It can be a very exciting time in your life. Don’t let the decision between an LLC and sole proprietor be a roadblock. It really is an easy process.
Good luck and kick some butt!
Helpful Links for Your New Local Small Business:
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My Recommended Bookkeeping Program for Local Small Business Owners: Freshbooks Link
Why? Helps you invoice quicker and more importantly, get paid quicker. Let’s you know when your clients have opened the email and they even help send reminders. Clients / customers can pay right from their phone or computer. Give it a Try: Freshbooks
**Freshbooks & Audible are affiliate links. This costs you nothing. I only recommend due to how much folks have loved it. I am paid a small commission but trust me. Even I use it. Try it for free for 30 days and see if you don’t love it too!
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