LLC Vs. Sole Proprietorship: What Are the Differences?

Having a million-dollar business idea isn't enough to set up your dream company. It would help if you had a proper understanding of the legal and financial framework required to support your business. There are different forms of business entities each with its own set of legal and tax advantages.

In this post, we will discuss some of the differences between LLCs and sole proprietorship:



Basic differences

A sole proprietorship is the easiest business entity to form. Just as the name suggests, the founder is the only legal owner of the company. You can create it with any name that you want. More or less, you simply need to file the necessary documents, pick the company's name, file a DBA (Doing Business As) Form and obtain the required licenses. Licenses vary based on geography and industry. Any financial liability, lawsuit, fine, or debt is the responsibility of the business owner.

On the other hand, a limited liability company is more of a blend of a corporation and a business partnership. The term 'limited liability' means that the business owner is often protected against many types of financial liabilities related to the company.

Lifespan

A sole proprietorship company ceases to exist when the business owner:

a. Sells the business

b. Retires

c. Dies

However, an LLC could potential live beyond the death of the member/owner. As an LLC owner, it’s also highly recommended that you have an operating agreement. The operating agreement should speak to what happens when a member passes away.



Ease of Raising Money

In the case of a sole proprietorship, the business owner needs to raise money alone. If the business is relatively new and lacks credibility in the market, it may be more difficult for the owner to get loans. The loans also largely depend on the business owner’s personal credit history. Similarly, if the business operations aren’t able to pay back the loan, the owner would probably be on the hook and this could also affect their credit score.

On the other hand, an LLC may have better capital raising options. There could be multiple members and each could contribute money or assets to the LLC, for example. Once established, the LLC might qualify for a business loan, and maybe even a business loan with no personal recourse against the member(s). However, having an LLC does not guarantee that the LLC will qualify for a loan becuae the lender may reject your request for a loan.

Owner Control

Sole proprietors have complete control over their business and earnings. They have the legal right to make any decision, including how to use the proceeds. In the case of an LLC, there is centralized management and it can either be run by the member(s) or the manager(s). There are a variety of ways that the LLC could be managed. Typically they’re either member managed or manager managed. You may also be able to outsource management functions and appoint an external manager to handle the day-to-day affairs.

If you're based in Houston, Austin, San Antonio, get in touch with us. The team of attorneys at Mike Massey Law can set up your LLC for only $250 plus filing fees.They can create an operating agreement as well, typically for $150 to $200. Here are the details.

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