What is the Difference Between a Sole Proprietorship and an LLC?

Owning a business can involve various challenging decisions, and one might be whether to set it up as an LLC or maintain it as a sole proprietorship.

Right now during the pandemic, being an LLC would make it easier for you to apply for a PPP (Paycheck Protection Program) or EIDL (Economic Injury Disaster Loan) and with the CARES Act, you may also be eligible for unemployment benefits.

But you may be asking yourself what the difference is between a sole proprietorship and an LLC…

Difference Between Sole Proprietorship and LLC

One similarity between the two is that both must apply for EIN (Employer ID Number). Still, there are several differences between an LLC corporation and a sole proprietorship:

  • Ownership details
  • Management and decision making
  • Liability questions

sole proprietorship

Qualities of a Sole Proprietorship

First, to be characterized as a sole proprietorship, there must be only a single owner. If there is more than one person or entity listed as the owner of the business, then it is no longer classified as a sole proprietorship.

This clearly affects the management of the business, as well given that this single owner is in charge of all significant decisions and aspects of the corporation, and there is nobody else who shares these duties.

Next, in a sole proprietorship, there is no distinction between the assets of the business and the owner’s personal finances. This means that the business owner is personally responsible for all financial obligations and debts accrued by the company.

Qualities of an LLC

LLC stands for Limited Liability Corporation, and this type of business is true to its title. The owner’s personal accounts are relatively protected against obligation for the fiscal ramifications of running a business, as an LLC separates the company as its own entity.

Furthermore, an LLC can be run by more than one person so management responsibilities might be split between two partners. This could hold its challenges, as people don’t always agree on what the best economic decision would be for shared assets and employees, but it does also divide up the burden of running a company.

Clearly, sole proprietorships and LLC’s each have pros and cons. Setting up an LLC requires the completion of an LLC application and filing with a particular state.

More Information

Visit the Gov Doc Filing website for additional details and resources regarding federal tax filing, LLC formation, sole proprietorships, and other questions. Gov Doc Filing can provide trustworthy, professional services in these endeavors and more.