In 2020, over 4.41 million new business applications were made in the United States. And over 1.3 million more applications were made in the first quarter of 2021 too. This points to the increasing number of people who want to try entrepreneurship.
And if you’re one of those people, it’s essential that you know everything about starting a business before actually taking the leap. You must know how to look for funding, hire employees, find an office space, and more.
One of the other important things that you need to handle while establishing a business is selecting the business structure. This choice can be difficult when you’re confused between Sole Proprietorships and LLCs as they have many overlaps. To help you understand them better, we’ve put together this guide.
Steps to Start the Business
The steps that you need to follow to start your business are different for each structure.
But in the case of LLCs, more steps are involved and you need to come up with more formal documentation too. You have to:
- File Articles of Organization.
- Develop an LLC Operating Agreement.
- Pay your state filing fees every year.
Yet another factor that might influence your choice of company structure is the ownership structure of the business. As a Sole Proprietor, you’d be the only owner of the business and you can’t have any partners.
LLCs, however, allow you to have multiple partners in the form of individuals, other LLCs, and even foreign firms.
How is the Business Taxed?
LLCs and Sole Proprietorships have different tax regimes. However, there are some similarities. Both of these structures provide pass-through taxation. This means that both profits and losses of the business “pass through” to the owners.
As a result, you’d be saved from double taxation and can show your profits or losses on your personal tax returns. However, you would need to pay a self-employment tax. You can avoid this tax if you own an LLC, though. For this, you can get it taxed as an S-Corp.
This would mean that you’d be treated as an employee of the business and thus won’t be subject to self-employment taxes. But in this case, you’d end up paying corporate taxes for the business.
But the learning doesn’t end here, check out this infographic designed by GovDocFiling to learn more about these business structures before making your decision.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.