Sole Proprietor vs Single Member, LLC (And How to Decide Which Is Best For You)

Knowing which is better, Sole Proprietor vs Single Member LLC, when it comes to setting up your business can be tough. When you’re an independent contractor, you’re busy actually running your business and hardly have time to sort through all the details!

So in this post, we’ll take a look at the differences between sole proprietors and Single Member LLCs.

Let’s dive in!

Sole Proprietor vs Single Member LLC

Sole proprietors and single member LLCs are often very similar. There are pros and cons to each choice of entity.

A single individual owns both business types. Both of them file taxes on their personal income tax returns (using Schedule C). Both are personally responsible for all self-employment taxes and business debts.

However, an LLC gives you a few choices that could be an advantage to you depending on your particular situation. Forbes has a good article that goes into more detail on “Sole Proprietorship Vs LLC” with good FAQs at the end if you want to dig further into the topic.

Here are a few of the key points they make:

1. An LLC gives you tax options. As we pointed out earlier, a sole proprietor is automatically taxed as a self-employed individual. And unless you specify otherwise, so is an LLC. Your taxes are filed using Schedule C, and you are responsible for all of your Social Security and Medicare taxes. However, if you choose to structure your company as an LLC, you have the option of being taxed as a corporation. In that case, you can become an employee of the company. As your company begins making significant profits, you may want to talk to our tax advisors about the advantages of making such an adjustment to your business structure.
2. An LLC protects your assets. It’s a great way to shield yourself from being personally liable for legal actions taken against your company. (More on that below.)
3. An LLC allows you to easily expand your company in the future. You may be the only owner/member now, but if you decide to bring in additional members down the road having an LLC in place can make that easier.
4. An LLC involves more fees and paperwork, though. There’s no cost involved with setting yourself up as a sole proprietor. In fact, it’s the default structure that the IRS assumes for you unless you tell them otherwise. However, there are certain legal fees and a small amount of paperwork associated with structuring your business as an LLC. It’s not enough to be overwhelming (and our team can help guide you through the process), but if you’re trying to pinch every penny as a small business it’s something to consider. Talk with one of our business pros to find out exactly what’s involved.

Does An Individual Need An LLC?

Forming an LLC can be a good idea for your business in a few situations:

• The type of work you do tends to involve a greater risk of lawsuits. Certain industries are more vulnerable than others:
  • Construction – contract disputes
  • Healthcare – malpractice claims
  • Retail – social discrimination accusations, environmental “slip and fall” claims
  • Manufacturing – injury from defective products
• You have a significant amount of personal wealth.

An LLC separates the assets of the business from the assets of the owner. Therefore, if a legal claim was made against your company (or if you had to file bankruptcy on your business), your home, possessions, and personal wealth may not be at risk.

There are several additional benefits to forming an LLC.

1. Present a More Professional Image – In a competitive marketplace, perception is often reality. If people looking to do business with someone like you see “Jane Doe Freelance Marketing”, they may think “she’s just a one-person operation; she can’t handle us.” But if they see “Doe Marketing, LLC” the name alone gives off a much bigger impression.
2. Totally Separate Accounts – As an independent contractor, you are usually working out of personal accounts. An LLC would require creating independent accounts for your business which will keep your personal and business finances separated and dramatically simplify things when it comes time to file taxes every year.
3. Name Security – When you form an LLC, you are required to register with the state you intend to do business in. Part of that process is verifying that the company name you have chosen isn’t being used by anyone else. Once you register it, it’s yours and it is protected.

Single Member LLC Independent Contractor

If you are wanting to work as an independent contractor but take advantage of the perks of structuring your business as an LLC, we recommend forming a “Single Member Limited-Liability Company” (SMLLC).

With this designation, your LLC is recognized as being owned by one “member” and enjoys all of the benefits that any other LLC does. It is simply a way of clarifying to the state in which you register exactly what kind of LLC you are.

Here’s how you become an SMLLC:

• File “Articles of Organization” with your state
• Create an “Operating Agreement” describing how your business will be run.
• Obtain an “Employer Identification Number” (even if you have no other employees)

We Can Help You Find the Perfect Structure For Your Business

Our team has been helping independent contractors and small business owners of all kinds set up their companies for over 40 years.

We understand that everyone is different, so we take the time to get to know you and your business in order to serve as your guide to success…whether it’s in choosing a structure, organizing your company, or filing taxes. (Check out all the services we offer through our Part-time CFO Consulting!)

Schedule a call with one of our team members today to see why you should “expect more from your CPA.”

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