For many entrepreneurs fresh to the startup world, they’re likely to incorporate as either a sole proprietorship or a limited liability company (LLC). Both legal structures are affordable and require little paperwork in order to get up and running. So, which one should your business choose? Are there pros and cons associated with these entities? Let’s break both formations down to find out.
The pros: Incorporating as a sole proprietor allows the owner to do several things that they would be unable to do with any other entity. Chiefly among them is the ability to be the boss. You, and only you, gets to call the shots and exercise complete control of the business.
Aside from putting yourself in charge, a sole proprietorship is ideal for small businesses that have little to no liability risk. If you own a storefront, this entity might not be a good fit for you. However, if you ran a business from home such as an Etsy shop or working as an online consultant, then a sole proprietorship may be up your alley since there are so few opportunities for unforeseen circumstances and risks, like customers being injured on your property, to occur.
The cons: Sole proprietorships do not offer liability protection. What does this mean, exactly? Many entities will provide liability protection which allows for the separation of personal and professional assets. If you decide to incorporate as a sole proprietor, then you are held responsible for everything that happens to your business. The entity has made you its boss and there is no line of separation provided between the business and your own personal properties. A customer may be injured at your home, but you might lose valuable customer information or accidentally damage products. If that happens, you are held liable for it. And, if you’re not careful, your business may even be faced with a lawsuit.
Another con in the sole proprietor corner is the issue of financing. Once again, this all ties in with the lack of separation between the business and its owner. If a sole proprietor wants to reach out to potential investors in order to finance or expand the business, for instance, there won’t be a business line of credit for their team to review. Instead, all eyes will be on the owner’s credit — which is hopefully in solid shape.
For further reading, check out our comprehensive article on sole proprietorship advantages.
The pros: One of the biggest advantages to incorporating as an LLC is that the formation provides its owners with liability protection. This helps keep professional and personal assets separate from one another, since the business is considered to be its own entity. Under an LLC, if a customer’s information is lost or products are damaged then the owner is not held personally responsible.
LLCs also allow for more flexibility. Perhaps you don’t want to work out of your home and would rather have a brick and mortar storefront. If you incorporate as an LLC, you may be allowed to open up a physical location. You may also choose your own tax entity as an LLC, picking either an S Corporation or C Corporation.
The cons: If you aspire to take your business public, remember that an LLC is not a public structure. You will need to switch to another entity, like a corporation, that is a public legal structure.
Of course! You don’t need to keep your business incorporated as the same formation forever, simply because you incorporated as one at its offset. It’s always possible to make the switch to a new formation, but it is also not my place to tell you which entity is right or wrong for your specific business. You might want to consult with a legal professional first to decide if this is truly the right move for your company and ask them any questions about what the process entails.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @mycorporation.