New business owners are faced with many decisions, from logo and website design to point-of-sale systems. One of the most important decisions you’ll make is determining your business entity, which defines how the local and federal government recognizes your business. Each business entity has specific requirements and offers various protections. Two of the most prevalent types of business structures are sole proprietorships and LLCs. Learn about each business structure and the differences here.
Sole Proprietorships
Sole proprietorships are one of the most popular business structures. Sole proprietorships are owned and operated by a single person, with no distinction between the business entity and the business owner. In the eyes of the law, the business and the business owner are the same.
Advantages
Sole proprietorships are simple to set up. Any new business created is automatically classified as a sole proprietorship unless you apply for another entity. There are no registration fees or requirements to form a sole proprietorship in Florida. You also can file for a fictitious business name as a sole proprietor (filing for a DBA comes with an additional fee). The lack of paperwork and registration needed to form a sole proprietorship makes it the easiest business to get up and running and is the most cost-effective way to start a business.
Drawbacks
The primary disadvantage of a sole proprietorship is that you, as the business owner, aren’t legally separated from your business. This makes you personally liable if someone were to sue your company. In the event of a lawsuit, the person could sue you for the value of your home or other personal possessions. Sole proprietorships also dissolve when you die, so someone cannot take over the business for you. You also cannot hire W2 employees as a sole proprietor, though you can take on contractors using 1099s.
Types of Businesses
Sole proprietorships are best for individual business owners who don’t plan to hire employees or have business partners. Sole proprietorships are designed for low-risk businesses with low overhead costs and low liability that don’t need many legal protections, such as small online retailers and service providers.
Limited Liability Corporation (LLC)
LLCs allow business owners to legally separate personal assets from business assets and offer various legal protections. One or multiple business partners can own an LLC, but each owner doesn’t own a share of the company.
Advantages
Legally separating business and personal assets is the primary advantage of creating an LLC. Someone could only sue for the total business value and profits, not your personal property or possessions. This offers businesses protection against legal issues without having to form a corporation. LLCs can have multiple owners and employees and are taxed less than corporations.
Drawbacks
LLCs must be registered with the state and maintain a business license. This requires an initial registration fee and an annual renewal fee. You must also keep separate accounting records for business and personal expenses, which increases the number of accounts and paperwork needed to maintain the business. LLCs are more expensive than sole proprietorships and often pay more taxes.
Types of Businesses
Many types of businesses can be LLCs. Many small businesses choose this entity because of its flexibility to grow with their business while remaining more cost-effective than a corporation.
Peppler Law: Business Attorney in Central Florida
At Peppler Law, P.A., we are dedicated to helping small businesses in the Central Florida area thrive. Ensure your business gets started on the right foot by establishing the right business entity for you. We can help with all aspects of forming your business, ensuring you meet all legal requirements. Call us at 407-307-3108 to schedule a meeting to get your new business up and running with a solid foundation.
