Sole proprietorships are the most common form chosen for new businesses, according to Business.gov. This is especially true for consultants, freelance journalists and other independent workers, Bankrate.com states. Another option for a solo professional is to form a limited liability company, or LLC. The up-front organization is more complex than for a sole proprietorship; however, an LLC offers advantages that are not available with a sole proprietorship.
Although many people mistakenly use the term "limited liability corporation" to refer to LLCs, they do not have the status of a separate legal entity. Unlike a corporation, an LLC is not liable for corporate income tax; its earnings pass through the company directly to individual members, who pay federal income tax along with self-employment taxes. Owners of an LLC are called members -- corporations, resident aliens and even other LLCs may claim membership in an LLC. Individuals may also structure their companies as LLCs to gain legal protection for their personal assets, according to Business.gov.
Sole Proprietorship Definition
A sole proprietorship consists of anyone who is in business for herself or is self-employed, according to Business.gov. Sole proprietorships are not required to register with the state; however, if you operate under a fictitious name, you must register that name with the proper authority. Sole proprietors must also obtain any licenses required by the city, state or federal government to legally operate their particular businesses. Like LLCs and unlike corporations, sole proprietorships are not considered separate legal entities -- income is declared on individual federal and state tax returns. Sole proprietors must also pay self-employment tax, according to the IRS.
Read More: Tax Differences Between an LLC & a Sole Proprietorship
Advantages of a Sole Proprietorship
Setting up a sole proprietorship is often as simple as opening a bank account for the business.You are not required to obtain an Employer Identification Number, or EIN, for a sole proprietorship unless you employ other workers. If you work from home and use your own name for your business, you may incur no start-up costs at all. Unlike a corporation, sole proprietorships are not subject to double taxation -- that is, corporate income tax plus tax on stockholders' dividends, according to Bankrate.com.
Advantages of an LLC
Unlike a sole proprietorship, an LLC provides legal and financial protection for the personal assets of its members against liability that results from transactions involving the business. In this respect, an LLC is more like a corporation. However, LLCs are not subject to corporate income tax or double taxation. In this respect, an LLC functions more like a sole proprietorship, according to Bankrate.com.