Since the pandemic has changed many of our work lives, I’ve talked with a number of people who are starting new businesses. Some started working from home and now have more time to work on that “side hustle,” some are recently unemployed and providing freelance or “gig” services, and still others have online or other business ideas that have come about because of the coronavirus. Whatever their reason, I tell them all the same thing–first make sure you start your business with a sound structure.
If you work for yourself, you may want to structure what you do for legal and tax purposes into an official business. Your two main choices are to create a sole proprietorship or to incorporate as a Limited Liability Company (LLC). There are many formation and tax complexities to the decision but for this blog, let’s focus on the main advantages and liability distinctions between the two.
A sole proprietorship is appropriate if you’re planning for a one-person business. As the name implies, if there is more than one owner, your business can’t be a sole proprietorship.
Here’s where we get to the primary disadvantage of sole proprietorships.
You cannot file bankruptcy for your business without filing personal bankruptcy.
Choosing to incorporate has advantages, and but also additional costs. An LLC combines elements of a partnership, sole proprietorship, and a corporation to ensure that the owners of the company are not personally liable for their company’s debts or liabilities.
Several more considerations go into your decision, including the tax advantages and disadvantages between the two, as well as funding and organizational considerations. The bottom line is, I want your entrepreneurial venture to be both officially established as a business but also protected. Let’s look at your situation together, and have a conversation about the best direction for you.
Additional Source:
LLC vs. Sole Proprietor: How to Make the Right Choice for Your Business Sole Proprietorship vs. LLC: How Do They Compare?