How to set up your business: Sole Prop vs. LLC
Alrighty. Let's talk about it.
Probably one of the biggest questions and WHAT IN THE WORLD DO I DO moments you'll have as a business owner.
HOW do I decide between Sole Proprietor and LLC?
First, if you have NO idea what I'm talking about...don't worry. Most people who don't own their own businesses don't have in depth knowledge of what these things are or how they work. So let's start with the basics of all basics.
When you decide to start a business there are various ways you can go about it for legal and financial (tax) purposes. When you register your business with your city or state (or both) you need to decide how you want your business to be recognized. Although there are more than just sole proprietor and LLC, for the sake of this email we are going to only discuss those two since those are the most common for the majority of small businesses (especially in their first few years of business)
Sole Proprietor
From Entrepreneur.com - The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name, such as Nancy's Nail Salon. The fictitious name is simply a trade name--it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business's debts.
LLC (Limited Liability Corporation)
From Entreprenuer.com - A form of business organization with the liability-shield advantages of a corporation.
There is a LOT more legal and financial info about LLC's but the MAIN advantage of making your business an LLC as opposed to a Sole Prop is that you are not personally liable for the debts of the business, OR if you get sued, they can't go after your personal assets. In some states it may be more complicated and costly to register your business as an LLC, but other than that it works very similarly to a Sole Prop.
*****I would like to caveat here, that I am not a legal or financial advisor and I'm also not here to tell you which of these to choose. However, based on this information you should be able to make a more well informed decision.
Personally, I was a sole proprietor for 5 years and when I moved to Seattle I registered my business as an LLC for the added protection now that I am further into my business and my business has grown exponentially.
And once my business started to really bring in some cash, I went one step further and designated myself as an S-Corp for tax purposes. This means that I provide myself a paycheck every month and my salary is listed as a deductible expense from the business thus reducing my overall taxable income.
Savin’ those dolla dolla bills y’all.
