What is the difference between a limited liability company (LLC) and a sole proprietorship? As its name implies, an LLC gives limited liability to its owners. A sole proprietorship, on the other hand, is a type of business that legally has no separate existence from its owner.
When choosing a legal structure for your small business, determine the costs and benefits, advantages and disadvantages of the two different types of companies. This will determine your obligations and responsibilities and how you pay your taxes in the event of a liability. Many business owners start as sole proprietors and later take the route to become Limited Liability Corporation for a variety of reasons.
An important factor in making this decision is liability. How much are you willing to be liable for? What is your role in the business? Answering these questions will guide you in your decision of how to structure your business.
A sole proprietorship can make you personally liable for all debts made by your company. If the company goes bankrupt or has a lot of debts, this will be reflected in your personal credit report and records. In contrast, an LLC is considered a separate legal entity and you won’t be required to pay the debt with your personal funds.
In case you become incapacitated or die, the business that you run as a sole proprietorship will stop existing and your heirs and family may find it difficult to continue the business. With an LLC, this remains a separate entity and will continue to operate.
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