Sole Proprietorship Vs. LLC Vs. Corporation

A limited liability company operation agreement with pen
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When you form a business, you have a lot of decisions to make regarding its structure. Do you need to worry about liability? What about taxes? There's no substitute for asking for advice from a qualified tax professional, but here are some definitions to help you in researching which structure might be right for you.

Sole Proprietorship

A single owner of an unincorporated business essentially operates the business as an extension of herself.

For tax purposes, profits and losses of the business flow through to the tax return of the owner.

Liabilities of the business also flow through to the owner. For example, if someone slips and falls on the business premises, the company damages the property of a customer or the company is unable to pay its debts, successful claims against the company may be levied against the bank account or lake house of the owner.

Limited Liability Company

An LLC is a business structure that many sole proprietors turn to for some legal protection. The owners and any officers and directors are protected from the liabilities of the company, including for their own negligence in operating the business. Single member limited liability companies are often treated by the IRS in the same way as sole proprietorships (meaning an individual attaches their business income to their personal tax return).

Can sole proprietors use a name different than their own in order to run a business?

Yes, "doing business as" or DBA allows you as a sole proprietor to use a business name rather than your personal name. In some places, you can use either your full name or part of your name plus a description of your product or service without filing an assumed name, e.g., Elena Garza Interior Design or J.

Washington Investigations. The exact rules vary from country to country and from state to state within the U.S., so check with your local business regulatory authority regarding your area. But if there's any implication that there are more people involved (Shawad & Sons, The Anderson Group, etc.), or if you just use the first name (Joe's Garage, Sam's Boat, etc.), you have to file an assumed name.

Corporation

A corporation is owned by one or more stockholders and managed by a board of directors (which may consist of only one person) elected by the stockholders.

The directors appoint officers who run the day-to-day business of the company. The stockholders, directors, and officers of the company are protected from the liabilities of the company, including liabilities for their own negligence in operation of the business (except in certain extraordinary circumstances). In an ordinary corporation (a “C Corporation”) the profits and losses of the corporation do not flow through to the tax returns of the owners. The corporation is a separate entity filing its own tax return and paying its own taxes. Corporate federal income tax rates are not set in graduated tax brackets, and corporations are also subject to franchise taxes in many states (in essences a state corporate income tax).

The stockholders may choose, however, to elect “S Corporation” status by making a filing with the IRS. In that case, the corporation is taxed like a partnership and the profits and losses of S Corporations flow through to the federal tax returns of the owners in accordance with their stock ownership. So what different between the S Corp and a traditional corporation (C-Corp)? The ability to have profits and losses pass through to the shareholder's personal tax return. For that reason, it's sometimes chosen by sole proprietors.

More on business structures here.