Should you Switch Your Business From Sole Proprietorship to LLC?
Deciding whether to incorporate or not incorporate your business could have a significant impact on your entity. You might also have a hard time selecting the right structure for your business. This is why your knowledge about these structures will contribute a lot in deciding for your business’ success in the future.
Among the types of business structures, sole proprietorship and LLC are the two best options for many entrepreneurs. The common denominator between the two is its independence and flexibility, ideal for individuals who want to grow a business on their own. Contemplating whether to switch your sole proprietorship business to an LLC can be a dilemma if you do not know both sides.
To help you break down the essential pointers before deciding, consider the following key takeaways of a sole proprietorship.
- Paper works are limited if you choose sole proprietorship. There are only some specific-industry permits and licenses that you need to have before you can operate.
- There are no formal state filings.
- In terms of tax, you are only required to pay for personal federal, local, state, and FICA or Federal Insurance Contributions Act taxes.
- You are not obliged to pay for unemployment and other business taxes.
- You have full control over your business.
If there are key takeaways, sole proprietorship also has drawbacks.
- Your personal assets are not protected. If your business has legal issues, commercial debts, and other left obligations, it means that your personal assets are at risk to cover your debts.
- Financing could be hard because investors rarely risk their assets on sole proprietorship businesses.
- Your business will have a lower credibility score in the market because you do not have a trading name. However, you can use DBA to solve this.
You might have heard some of the winning features of a Limited Liability Company, but you still need to take a glance at the following pros and cons of this business structure.
- You have liability protection, which can save your personal assets from debts and lawsuits put against your business.
- You can have a high amount of credibility in the market given the fact that you have a trading name.
- You can obtain financing or business loans easier because your personal information is separated from your business.
- You can choose to be taxed as sole proprietorship too.
LLC also has the following consequences.
- You have to deal with too much paperwork.
- Filing annual reports is required.
- You need to obtain almost all licenses and permits.
- Completion of the tax return is considerably higher than a sole proprietorship.
Note: Forming an LLC requires state filing, which includes your business or trade name, registered agent, and other information. You need to file the Articles of Organization to the Secretary of State and will require a filing fee. If your business is in Texas and you’re wondering how much does an LLC cost in Texas, it normally starts at $300.
Now that you have seen both sides, it’s time to answer the question at the beginning. Should you switch your business from sole proprietorship to LLC? A sole proprietorship is as simple and easy as going to an office to start working, while an LLC will require you a system of process before you can operate. To give you a piece of advice, an LLC would be a better choice if you want to play safe and grow at the same time in your business ventures. So, you might as well choose where your personal assets are intact and safe.