Three Benefits of a Single-Member LLC versus a Sole Proprietorship

When it comes to starting a new business, there are many different decisions to make, and getting it right from the outset is so important.

Among the tasks that you’ll need to work through is deciding how you want your business to be structured, including whether to just start doing business as a sole proprietorship, or to take the extra steps to form a single-member LLC (Limited Liability Company). While there are similarities between the two, there are also important differences to look out for, which could mean that one route is much more advantageous for your business.

If you start doing business by yourself as the only owner, by default you are a sole proprietorship. This means that you and your business are legally one and the same, with no legal separation between the two. So, if something goes wrong in your business, your personal assets won’t be protected if you are a sole proprietorship.

The three main benefits for making your business a single-member LLC versus a sole proprietorship are:

  • An LLC has limited liability
  • There are potential tax benefits
  • Owners of LLCs have greater control

Limited Liability

The limited liability of an LLC means it is a separate legal entity and, therefore, the single member won’t be held personally responsible for any debts that are only in the name of the business. If the LLC were to go bankrupt, be sued, or become unable to pay back debts, the single member wouldn’t be expected to use their personal savings to cover the losses.

Pass-through taxation

“Pass-through” taxation means that the business entity itself is not liable for income tax, so its profits are passed directly through to the single member who must report this income when they make their tax return. This is because the IRS does not recognize a single-member LLC as a separate taxable entity. Rather it treats the single member the same as if they were the sole proprietor of the business and profits are taxed at the same rate as the individual’s business rates. LLCs therefore, do not pay business tax at the federal level, and because there is no business tax for single-member LLCs in most states across the US, this can have significant financial advantages.

Increased control

A single-member LLC has no shareholders, no board of directors, and can make all decisions without consulting a third party. They are entitled to the full share of the profits and are entirely in control of how the business operates. This is the same kind of control as a sole proprietor has, but with far greater legal protection, and unlike a corporation where other parties would be involved.

Deciding the type of entity you choose for your business will have both financial and legal consequences, so understanding the different aspects of each and doing your research is critical. Enlisting the help of an experienced business attorney like John Espinosa can provide you with professional guidance to ensure you make the best choice. Contact our friendly team at (978) 288-1468 to schedule your free consultation.

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John Espinosa, Esq.

John Espinosa helps entrepreneurs do business right by providing convenient access to quality legal advice and services, with more than 15 years experience in the legal field from multiple perspectives.

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