Flexibility can be a huge asset, and your business’s legal form affects just how flexible your business can be. The simplest form for a single entrepreneur is the Sole Proprietorship, conferred automatically the moment you start doing business. However, in some cases, founding a Limited Liability Company (LLC) might be a better choice.

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How Do You Set Up a Sole Proprietorship vs. an LLC?

Sole Proprietorships are very simple to set up in comparison with other business entities. In a Sole Proprietorship, you and your business are one-and-the-same from a legal perspective, meaning you have total control, simple taxation, and require little to no paperwork to start operating. By contrast, an LLC will require filing Articles of Organization or a Certificate of Formation with the appropriate state authorities, as well as a nominal fee. An LLC is a separate legal entity, which can provide you with a number of benefits, including limited liability. Since each state regulates LLCs a little differently, it’s a good idea to do a little research before you set one up. As with starting any company (including a Sole Proprietorship) it’s always a wise move to speak to an attorney and ask any legal questions before you begin.

What Are the Advantages and Disadvantages?

An LLC offers several advantages that a Sole Proprietorship lacks. The key drawback of a Sole Proprietorship is that you have unlimited personal liability for any debts your business incurs, since you and your business are the same legal entity. By contrast, an LLC is a separate legal entity, which holds sole liability for the debts of the company. Furthermore, while a Sole Proprietorship is, by definition, limited to one owner, an LLC can easily accept new members. Even then, under current regulations, it retains flexibility in regulating how it operates (you can use an LLC Operating Agreement to outline your LLC’s operating terms). Finally, an LLC grants a lot of flexibility when it comes to selecting taxation. It can be taxed as a Corporation, a Partnership, or as a Sole Proprietorship as a Single Member LLC.

Should You Form an LLC?

The answer to the Sole Proprietorship vs.LLC dilemma depends primarily on what you want to achieve with your business. For large, potentially risky ventures, a single person LLC (provided it’s possible in your state) may be a better choice over Sole Proprietorship. However, for very small ventures, an LLC may be more than you need.

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