When launching a new business, one of the first decisions entrepreneurs face involves choosing the appropriate business structure. This determines everything from how a company is taxed to what level of liability the owner has if legal action is taken against the business.
Sole proprietorships and limited liability companies (LLCs) are two common business structures that new owners should consider, alongside partnerships and corporations. Each structure is designed to benefit different business types.
Basic structure of both business types
A sole proprietorship is the simplest and most straightforward business form, where a single individual owns and operates the business. This structure doesn’t have a legal distinction between the owner’s personal and business assets and liabilities.
An LLC creates a separate legal entity for the business. This provides a shield for personal assets against business debts and claims. That protection isn’t available in a sole proprietorship.
Choosing a sole proprietorship
Sole proprietorships are ideally suited for individuals embarking on low-risk business ventures with minimal initial investment or complexity. This structure is appealing for its ease of setup and lower upfront costs. It’s a popular choice for freelancers and consultants who prefer direct control over their operations.
Opting for a limited liability company
An LLC is a more suitable option for businesses that face a higher risk of liability, have substantial investments or involve partners. It offers flexibility in management and profit distribution, allowing owners to structure their business in a way that best suits their needs. LLCs are often recommended for businesses planning to seek outside investment, expand rapidly or sell physical products that could lead to liability issues.
Working with someone familiar with setting up a new business and handling the legal aspects of this process can help entrepreneurs determine what to do for the best.