Watch CBS News
We may receive commissions from some links to products on this page. Promotions are subject to availability and retailer terms.
By Rachel Layne
/ CBS News
When you’re starting a small business on your own, choosing a setup – or business structure – can seem daunting. As a business owner, you’ll most likely first choose whether to run your business as a sole proprietorship or an LLC (limited liability company). Your decision will have consequences not just for your business, but also for your personal finances, taxes and liability.
If you’re a prospective small business owner, you might not know where to begin with a business structure. An online small business lending company can help you navigate the process – plus, you can apply for a loan within minutes.
If you’re looking for more guidance on how to set up your small business, here’s an easy guide.
Much of your choice may depend on your business type. As always, it’s a good idea to consult with a lawyer, business counselor, accountant or professional organization in your field.
Consider your long-term ambitions for the business. Do you plan to add employees and managers, or will it just be you running things over the long term?
If you don’t anticipate expanding the business or adding partners, then sole proprietorship may be for you.
LLCs can be a good choice if your business comes with legal or financial risks, or if you want liability protection for your personal assets. Research what’s required under your state’s rules through your secretary of state’s office. Another good source of information is the U.S. Small Business Administration.
Before you make any final decisions, make sure you do some thorough research. It’s important to fully understand the difference between an LLC and a sole proprietorship – and what each option has to offer. Let’s start with an LLC.
An LLC does just what it sounds like: it limits personal liability for business owners. It also splits business from your personal activities.
Many people who create a business form an LLC to shield personal assets like vehicles, homes and savings from legal or financial trouble, such as bankruptcy or business debt collectors.
LLCs are governed by the states, mostly through the secretary of state’s office. You will likely incur an initial filing fee. Fees vary widely from state to state – with most between $50 and $150. Some are higher. Many states also require an ongoing compliance fee and/or an annual report or update. You’ll want to thoroughly research your state’s requirements.
LLCs can be owned by many people, companies, other LLCs or even foreign entities. Most states don’t limit the number of LLC owners. Many states also allow single-member LLCs.
If you’re in need of a small business loan, you have options to consider.
A sole proprietorship means you’re working for yourself alone. You’re in charge and are responsible for the business entity.
It’s the easiest business type to form with the lowest startup costs. Independent contractors, business owners and even franchisees can all be sole proprietors. In fact, if you earn revenue from a solo business, you may not realize the IRS considers that work a sole proprietorship by default.
As a sole proprietor, you are personally responsible for any and all decisions or risks, including legal compliance, permits, accounts, taxes, debts and contracts.
That’s perhaps the biggest difference between a sole proprietorship and an LLC. Unlike a sole proprietorship, an LLC can help you avoid personal legal, tax and debt trouble if you are sued or a debt collector comes after unpaid bills for the business.
Under a sole proprietorship, your business name is automatically the same as your personal name. You can also register a fictitious, or trade, name to distinguish your business from your personal activities. That’s known as a DBA,
You don’t have to file a separate tax return from your personal return as a sole proprietor. Technically, a sole proprietorship falls under IRS “pass-through” tax rules. That means business operations, including earnings, pass through to your personal tax return.
LLCs have more options. You’ll want to consider them carefully. There are many kinds of LLCs and the IRS treats some of them differently. For example, the IRS automatically treats LLCs using the same “pass-through” rules as a sole proprietorship. The LLC doesn’t pay taxes on business income. Rather the members – or owners – pay taxes on their share of the LLC’s business profits.
But LLC owners can also ask to be taxed as a corporation. That may have certain advantages for some kinds of business owners, vehicle you may want to use.
Check with an accountant, lawyer or financial advisor to see what structure might be right for you and your goals.
Here are some factors to think about before you pick an LLC or sole proprietorship:
Simply put: yes. You may want to consider converting if you’re concerned about legal exposure, or if you want to grow your business beyond a single owner or partnership.
First published on July 7, 2022 / 3:50 PM
© 2022 CBS Interactive Inc. All Rights Reserved.
Copyright ©2022 CBS Interactive Inc. All rights reserved.
Quotes delayed at least 15 minutes.
Market data provided by ICE Data Services. ICE Limitations. Powered and implemented by FactSet. News provided by The Associated Press. Legal Statement.
Watch CBS News