Sole Proprietorship or Single-Member LLC:

Sole Proprietorship or Single-member LLC

Which is Right for Your Business?

With the internet at your fingertips, going into business for yourself has never been easier. Whether you are a freelancer, a consultant, or an entrepreneur, your web presence introduces you to potential clients around the world. There are unlimited possibilities to expand your business and reach new markets. However, choosing a business model  can be overwhelming. There are many different options for your corporate structure. The most common choices are Sole Proprietorship or a Single-member LLC. Each one has its benefits and drawbacks, but here are a few questions to help guide your decision.

What are the Differences Between Sole Proprietorship and an LLC?

Sole Proprietorship is the most basic structure and requires minimal paperwork. Essentially, when you begin doing business, you are operating as the sole proprietor. There is no legal separation between you and your business. However, it requires you to separate your personal and business assets. You must maintain separate accounts for each.

Single-member LLCs are limited liability companies  that are owned and operated by a single person. The owner must file paperwork with the state where they plan to do business and comply with all local regulations. For tax purposes, they are considered ‘disregarded entities.’ However, LLCs are separate legal entities when it comes to questions of liability. This business structure protects the owner’s and the company’s assets from any claims or lawsuits brought against the other. It requires more time and paperwork to set up, but can protect you and the future of your company.

What are the Tax Advantages and Disadvantages?

Both models can  file with personal income taxes using Schedule C. You simply list your company’s income and expenses on your return. However, accurate bookkeeping is crucial. If you don’t stay on top of your records, it could make the filing process more complicated than it needs to be.

The major responsibility for a sole proprietor is the self-employment tax. You are responsible for both the employer’s and the employee’s share of FICA taxes which is 15.3%. The taxation rates are higher, although the employer share can be deducted as a business expense.

Single-member LLCs also have the option to file as a C Corporation. Depending on the owner’s income, paying the corporate taxation rates may be more advantageous. The laws relating to corporate taxation vary between states. Filing as a corporation could get you a larger return depending where you live. There are a number of factors to consider when choosing how to file, but owning an LLC gives you options.

How Does it Affect Liability?

The greatest advantage of forming a Single-member LLC is liability protection. Since a sole proprietor and the business are considered one entity, you are left vulnerable. Since the LLC is a separate legal entity, there is no personal liability for the owner. All of your private assets are shielded under the umbrella of the LLC. This means that your home, vehicle, and accounts cannot be seized in the case of indebtedness or bankruptcy. Although financial contributions to the Single-member LLC may be at risk, your personal assets are off limits.

This protection also works both ways. Your business assets are safeguarded against personal liabilities, debts, or bankruptcy. If you suffer personal misfortunes, the LLC will protect your business from personal creditors. Keep in mind this separation can’t be maintained if you ‘pierce the corporate veil.’

Should I Choose Sole Proprietorship or Single-member LLC?

Every company’s needs and situations vary over time. As your company grows, these needs evolve as well. Both structures have their advantages and disadvantages, but you’ll need to choose one. Sole Proprietorships are easy to form and dissolve in addition to offering pass-through taxation. While it does require more paperwork, a Single-member LLC provides liability protection and flexibility when filing taxes.

If your business is operating with little or no liability, sole proprietorship is probably your best option. However, if you plan to expand your business, incorporate other LLCs, or convert to an S corporation down the line, you should consider a Single-member LLC. Remember, these are only general suggestions to lead you in the right direction. Make time to sit down with your financial advisor to decide which structure is best for your business.

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LLC vs. Sole Proprietorship: Which One Makes More Financial Sense?

llc vs sole proprietorship

Should I select an LLC vs. sole proprietorship? That’s the question that I’ve been asking myself lately as I look at small business planning.

You see, I’ve been an independent contractor / freelancer for a long time. However, I’ve recently started thinking that it makes financial sense to separate my personal and business money. Of course, there are many different ways to do that, but setting myself up as a business seems to be a good next step.

Most likely I’m going to go with a sole proprietorship. I had that kind of business a long time ago and it seemed to suit me just fine. Nevertheless, I don’t just want to jump in willy nilly, so I’m carefully exploring the differences between LLC vs sole proprietorship to make sure I go down the right path.

LLC vs. Sole Proprietorship: Liability

There are many different ways to structure a business. I’ve narrowed it down to LLC vs sole proprietorship. The main difference as I’ve always understood is about my own personal liability. An LLC is a “limited liability corporation” which means that I as an individual have limited liability in comparison to if I were a sole proprietor. In other words, if someone sues my business and I lose, the costs can only affect my business, not my personal finances. In contrast, as a sole proprietor, I’m personally still responsible for the costs of the business. The same is true for creditor issues. It’s worth taking that liability into consideration.

LLCs Cost More to Set Up

Although that limited liability is nice, it comes with a price. It doesn’t really cost much at all to set up a sole proprietorship business. In contrast, there are a lot of fees involved with setting up an LLC. You have to register with the state so there are fees associated with registration and filing documents. Oftentimes, LLCs are also subject to ongoing annual fees. In other words, if you don’t pay each year, then you don’t maintain your LLC registration. You don’t have those costs associated with setting up a sole proprietor business. In general, LLCs are subject to a lot more regulations, which can mean more paperwork, which can mean more time and money.

LLC vs. Sole Proprietorship: Taxes

I currently pay taxes as a self-employed person. If I choose to set up my business as a sole proprietor then I will still pay taxes as a self-employed person. Therefore, for better or worse, my tax situation isn’t going to change. Things seem a little bit more complicated if I decide to set up an LLC. An LLC can be a partnership or a corporation, but it can also be solely-owned. In the later case, it would be taxed like a sole proprietorship.

Therefore, there doesn’t seem to be a huge tax difference for me personally by doing LLC vs sole proprietorship. That said, if I opted to file as a corporation, that could make a difference, which is something worth exploring more. If I do an LLC, I’ll have to file separate business and personal taxes, which I wouldn’t have to do if I set up as a sole proprietor.

Separating Business and Personal Finances

The main reason that I was planning to set myself up as a business is because I want to separate my finances. However, I’m leaning towards doing a sole proprietorship, which actually doesn’t require me to separate my finances. An LLC strictly requires that you keep your business and personal expenses entirely separate. In contrast, you don’t have to do that with a sole proprietorship. You are the business. Therefore, that part wouldn’t actually be different than what I’m doing now as a freelancer. Of course, I still want to separate them, but in the eyes of the government, they wouldn’t need to be.

A sole proprietorship is the right thing for me. My business finances are pretty simple. I don’t run a lot of risk regarding liability. And I don’t want to spend the extra money to become an LLC. But anyone making this decision should certainly look at both options with an eye towards what makes financial sense for them.

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Write-Offs For Small Businesses That Are Often Missed

Write-offs for your small business

Write-offs for your small business

Write-offs are often hiding right under our noses.

If you’re a small business owner that has yet to file your 2015 taxes, you’re probably jumping for joy over the news that taxes are now due April 18 instead of April 15. And, if you do have yet to file, this also buys you a little more time to review and evaluate your expenses and potential deductions with your accountant.

As you finish the filing process, be sure to keep these write-offs for small businesses that are often missed in mind:

  1. Your startup costs. As surprising as it may be, if you are in your first year of business, costs accrued to start up your business count as capital expenses and can be deducted up to $5,000. If fees go beyond this limit, you can opt to write-off certain initial investments over a period of 15 years. Also, if your attempt to start your business is sadly unsuccessful, you can still deduct the costs as a capital loss.
  2. Health insurance premiums. While this expense would not be considered a business write-off, you can deduct this as a personal expense on a 1040 form if you are self-employed. Deductible premiums includes ones paid for yourself and your immediate family.
  3. Home office. You may already be aware of this one, but small businesses tend to forget about this or often surprisingly steer clear of trying to include this in their write-offs due to worry of an audit to the business owner. If the space is used strictly for business, though, and nothing else, such as entertainment for guests or other family members, this is a business deduction from your taxes. Your home office doesn’t need its own room to count; it can still be a part of another room in the home. To determine the amount that is deductible in a shared space, you would measure the work space and divide by the square footage of the room. Read more about the home business tax filing and deduction process here.
  4. Bank fees. Charges from your bank for ATM withdrawals, account fees and the like are completely deductible. Make sure to keep this in mind when filing and reporting your expenses throughout the year.
  5. Office supplies. Keep a steady record of the receipts and purchases of your office supplies used for your small business. These will help to provide a tax break for you.
  6. Furniture and other equipment. Office furniture or furniture and equipment used for your company can be deducted in full the same year of purchase or depreciate, which is taking a portion over a period of time. For furniture, you would deduct through the course of seven years. For other equipment, such as computers and printers, you would depreciate for five years.
  7. Driving your car. If your vehicle is a staple for your organization, the IRS permits you to write-off some of the costs. Even if you only periodically use your car for meeting with clients or other business-related exchanges in between your personal errands, you can still receive a tax break for related costs. Just be sure to maintain strong documentation on mileage, gas, parking and toll fees and even the justification for drive. We recommend immediately writing this information down per trip with the date included to avoid having to go back and remember these tedious details.
  8. Credit card interest. If you were paying for business items with your credit card, you can deduct the interest paid on the card on your taxes.

Some other expenses that can be write-offs for your small business include but are not limited to: education costs, subscriptions to industry publications or memberships related to increasing knowledge in your trade, travel charges, and even some entertainment expenses. You can read more about those tax breaks in this helpful guide.

Make sure to always inquire about what can be included as a deduction for your small business so that you can use more funds to do those bigger things we know you are all meant to do.