Many small business owners launch as a sole proprietorship, where the business and its owner are deemed to be the same entity, using the social security number of the owner, and reporting income on the owner’s personal tax return. However, by operating as a limited liability company (LLC), small business owners enjoy significant advantages, most importantly the protection of personal assets from the debts or legal judgments of the business. The advantages of operating your small business as an LLC can include the following:
Personal Asset Protection
If sole proprietorship is sued by a customer, courts can look to your personal assets (e.g. your home, bank accounts, etc.) to satisfy a judgment against your business. By choosing to operate as an LLC, and observe certain corporate formalities, the court cannot look to your personal assets to satisfy the judgment. Further, if your sole proprietorship is bankrupt, creditors may look to your personal assets to satisfy the debts of the sole proprietorship. The members of an LLC are only liable for the debts and obligations of the LLC, meaning your personal assets cannot be reached by creditors of your business.
Business Asset Protection
As a sole proprietor, there is no distinction between the business and personal aspects of your life. Say you’re involved in an accident and sued personally. A court can look to your business assets to satisfy the judgment against you.
A sole proprietorship is taxed at the same rate as an LLC, but without protecting the owner’s personal assets. Alternatively, an LLC may choose how it will be treated for tax purposes. For instance, an LLC may opt to be taxed as a sole proprietorship, corporation or partnership.
Business Name Protection
Your business name must be distinguishable from any other existing business’ name. Because sole proprietorships are not registered with the state in which they’re operating, there is nothing stopping another business from starting and operating under the name of your business. In fact, if you later decide to register your business as an LLC and the name has been taken, you’re prohibited from using that name.
The life of an LLC starts upon registration with the Secretary of State, and ends only upon dissolution of the entity with the Secretary of State. Your ownership interest in your LLC is fully transferable, descendible and devisable. A sole proprietorship lives and dies with its owner, making business succession impossible.
Selecting the proper structure for your business can maximize your opportunities for success, but can be a challenge to navigate on your own. At Wiley Etter, LLC our attorneys are experienced in the creation and incorporation of new businesses, protecting businesses from legal pitfalls and developing creative solutions to common legal issues. Contact us today for a free 1-hour consultation.