Should I be a Sole Proprietor or an LLC?

A guest post by accountant, bassoonist, and piano-teacher, Tairsa Mathews

When starting a business (or just adjusting the way you manage your business) there are a lot of options to choose from. Before studying accounting I didn’t know what it meant to be a sole proprietor or a limited liability company. I honestly don’t think I had heard these terms. Let me provide a brief definition of each.

Sole Proprietor: One person owns all the assets of the business, in contrast to a partnership or a corporation.A person who does business for himself is a sole proprietor. Anyone who does business without formally creating a business organization is a sole proprietor. Many small businesses operate as sole proprietorships. Professionals, consultants, and other service businesses that require minimum amounts of capital often operate this way.

LLC: A noncorporate business whose owners actively participate in the organization’s management and are protected against personal liability for the organization’s debts and obligations. The  LLC (limited liability company) is a hybrid legal entity that has both the characteristics of a corporation and of a partnership. An LLC provides its owners with corporate-like protection against personal liability. It is, however, usually treated as a noncorporate business organization for tax purposes.

 Let me now interpret this. A sole proprietor is essentially anybody that goes into business for themselves. There are no legal requirements to be a sole proprietor, but it is technically a legal requirement to obtain a business license in your city of main operation. Most sole proprietorships operate under the table (which is illegal, but unfortunately the case) as it is easy to not keep track of income. The advantage of a sole proprietorship is that it is incredibly simple. Your income is taxed on your regular form 1040 each year.

An LLC is a government recognized entity. It functions essentially as its own unit. It pays its own taxes, can take out its own loans, and can purchase property. An LLC is excellent if you expect to have liabilities. This protects your personal assets. If someone sues a sole proprietor they can take EVERYTHING the sole proprietor owns; their house, their car, etc. If an LLC is sued, all that can be lost are business assets. The owner of an LLC is only liable to the extent of his personal investment in the LLC.

Setting up an LLC is also not very difficult. You incorporate your business through the state you live in. (For me, I set it up through Utah.gov and it took a matter of 20 minutes). You also need to obtain a business license for the city in which you operate. You are required to renew your business once a year at a cost of $15, but so long as you do that, you will remain in good standing. With an LLC you will file form 1065 for taxes, which will roll through to your regular 1040 and be taxed at your personal tax rate. Basically, an LLC is an excellent way of being treated as a corporation, while still being taxed as an individual. AWESOME!

Whether you function as an LLC or as Sole Proprietor, your taxes will be the same. Sole Proprietorship is less paperwork and quicker at the upstart. An LLC is an excellent way to keep your business and personal life and finances separate. I have found for myself that and LLC was the best way for me to run my piano teaching business, but before you make any decisions about this I would recommend you discuss this with your accountant.