Deciding Between Proprietorship Vs Limited Liability Company

When an entrepreneur decides to start a business, there are several different structures for them to choose from. Each has its own advantages. The type of organization chosen will affect the way they are viewed by the IRS. Depending on the industry and tax situation, the type of organizational structure chosen will have different legal implications, for the entrepreneur as well as their new company. The four primary options are sole proprietorships, partnerships, corporations, S corporations and limited liability companies. Sole proprietorships and limited liability corporations are the fastest, easiest structures to set up. They are most frequently used for start-ups, contractors and consultants.

There are several advantages to a sole proprietorship. Many business structures require significant costs to get started. Attorneys are generally required to assist in properly setting up various types of corporations. This is not necessary for sole proprietorships. The forms are usually simple, one page documents that require notarization. Minimal fees are required to register with the state and get an employer identification number. At tax time, a standard 1040 form can be used. All of the company's transactions are itemized as profits and losses. The owner is considered self-employed, as opposed to being employed by a separate entity.

The primary downside to a sole proprietorship is the liability aspect. The owner is personally liable for all debts and actions of the company, since it is tied to them directly. All of the owner's assets and personal wealth are linked to the organization, which makes the venture a greater financial risk. This is especially true if the industry is considered high-risk. For many entrepreneurs, the exposure of this type of business structure is too great. To protect their assets, which include their home and savings accounts, they often opt to set up a limited liability company.

A limited liability company is a relatively new business structure. It combines several features of a corporation and partnership, which makes it appropriate for many start-ups. Whereas partnerships are split 50-50, limited liability companies have more flexibility. Official minutes are not required as they are for corporations and profits and losses flow through the organization, allowing owners to avoid paying corporation taxes as well as individual taxes. This type of company provides a layer of protection between the owners and the debt and liability assumed by the organization. This means that their personal assets are protected against lawsuits and other legal action.