LLC vs. Sole Proprietorship DEBUNKED!
Updated: Jan 3
Thinking about starting a small business or already have one and still don’t know what LLC or Sole Proprietorship even mean? That’s okay, you’re not alone. No legal jargon, no tax jargon, no NOTHING jargon -- just facts.
LLC stands for ‘Limited Liability Company’ and that is STILL, not helpful. So, let’s break it down further.
‘Limited Liability’ is a type of legal structure for a business where a loss will not exceed the amount invested into the business. Basically, YOUR assets are not at risk if your company tanks. (Investopedia, 2019)
LLC = Your company is responsible and YOU are LESS responsible.
I need to use a spell checker to even spell Sole Proprietorship correctly… so, let’s break that down, too.
When a Sole Proprietorship is established, no legal entity is created making the business owner responsible for all debts and liabilities incurred. (Investopedia, 2019)
Sole Proprietor = You are the only one RESPONSIBLE for everything.
Now that we have conquered the definitions, let’s use each in an example.
Cedric Bates and Korbyn Harper both own small businesses.
Cedric has a landscaping business setup as a Sole Proprietorship
Korbyn has a pressure washing business registered as an LLC
(Sole Proprietor) Example #1- Cedric is mowing the grassy area of a commercial property when all the sudden, his trailer that carries his supplies, comes loose and injures someone and causes extensive amounts of property damage. The property owner decides to sue Cedric.
(LLC) Example #2- Korbyn is pressure washing the outside and sidewalk area of a commercial building and somehow, a rock picked up by the spray of his pressure washer is launched through a closeby building’s window. The rock injures an employee inside of the building. The building owner decides to sue Korbyn.
Who is better protected in the event of a lawsuit?
If you said the LLC, Korbyn, you would be correct. The LLC keeps him and his personal assets separate from his business. In a sense, his business gets sued, not him.
When sh*t get’s real and you, or one of your employees, is responsible for doing something negligent, EVEN if you didn’t mean to, a Limited Liability Company offers more protection for the owner and members.
The MAIN difference between an LLC and Sole Proprietorship is how well YOU, the OWNER, are protected when things don’t go exactly as planned.
I’ve read A LOT of articles and even text book material about business organizational structure and entity types. The ONLY benefit I’ve found to having a Sole Proprietorship is the cost and said, ‘simplicity’.
If you wanted simple are you really invoking the TRUE 'Entrepreneurial Spirit?
These are two of the "negative" traits about establishing an LLC that I found online. (Legal Zoom, 2019)
LLC must keep funds separate from personal funds
LLC must register business entity and pay registration fees
If something really bad were to happen to your business, would you really want your business funds mingling with your personal funds? Would you NOT want to be registered with the state like a legitimate business? The answer to those questions is “No”. These are NOT negative aspects to an LLC, they are safeguards for the owner.
I sell insurance in many states, ALL with a home based LLC. My company is registered, licensed and insured, in addition to paying all of the associated fees every year. Piled on top of THAT are all of the required insurance licenses that I pay for each year. I sure don’t SMILE when I pay hundreds and sometimes thousands in insurance and registration fees, but I know its importance and the role it plays in my business.
If you’re just working a little side hustle, I understand chillin’ with a Sole Prop, but if you’re serious and you want to scale, the best way to go on every level is a Limited Liability Company. Despite, its additional cost over Sole Proprietorship, an LLC can be just as simple for small businesses, while also allowing room for much additional growth.
This is a simplistic view of the difference between a Sole Proprietorship and an LLC. There are many different additional, tax benefits of an LLC depending on how you scale your business. The protection that an LLC provides makes it MORE than worth the additional costs and brain work.