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Why opt for an LLC structure over a sole proprietorship?

On Behalf of | Apr 26, 2024 | Business Law

Choosing the right business structure is a consequential decision-making process for aspiring business owners. If you are launching a new operation, the choice you make now will affect everything from daily operations to personal liability and tax obligations. 

While a sole proprietorship is generally the simplest and most straightforward business structure available, forming a Limited Liability Company (LLC) offers significant advantages that can be more beneficial for many business owners. 

LLCs offer more protection

One of the primary benefits of an LLC is the protection of personal assets. Sole proprietorships do not offer a legal distinction between the owner and the business. This means that personal assets like your home, car and savings could be at risk if your business is sued or incurs debt. An LLC, however, provides a legal separation between the owner’s personal assets and the liabilities of the business, which acts as a personal liability shield of sorts. 

LLC structures also offer more flexibility in how you are taxed. Sole proprietors are subject to a pass-through structure wherein they are taxed on their personal returns. Conversely, an LLC can choose between being taxed as a sole proprietorship/partnership or a corporation. 

Finally, while a sole proprietorship ends upon the owner’s death or withdrawal from the business, an LLC can continue to operate. Ownership in an LLC can be transferred more easily than in a sole proprietorship, where transferring the ownership requires establishing an entirely new business entity.

If you’re trying to get your solo-owned business off the ground quickly, a sole proprietorship may be a tempting option. However, taking the time to invest in an LLC structure may be wiser in the end.