A person who’s starting a business will have to determine what type of business structure they plan to use. This decision directly impacts various aspects of the company’s operations, so it’s critical that they fully understand their chosen option.
For a new small business, the owner may need to choose between a sole proprietorship and a limited liability company (LLC). There are some very specific differences between these that must be considered when the new owner is trying to decide which is best.
LLCs provide significant protection
A sole proprietorship doesn’t differentiate between the owner’s personal affairs and the business’ affairs. This means that the owner can lose everything if someone successfully sues the company.
An LLC draws a clear dividing line between the owner’s affairs and the business’ affairs. This means that the owner’s assets aren’t at risk if the company is successfully sued as long as there isn’t any fraud on the owner’s part or commingling of business and personal assets.
Simplified taxation
Income taxes in both sole proprietorships and LLCs are handled on the owner’s personal income tax return. This pass-through taxation prevents double taxation that would occur if the company had to pay taxes prior to the owner paying taxes on their income.
The business structure is only one aspect of starting a business that the aspiring entrepreneur has to consider. Working with someone familiar with the legal aspects of starting businesses is beneficial because they can provide guidance about how to get everything set up properly.
