Limited Liability Company or Sole Proprietorship? What's the difference and how do I choose?
At least once a month someone asks me, why should I become an LLC instead of remaining a Sole Proprietor? What's the difference? Since so many people are asking, I thought I'd share the advantages of Limited Liability Companies for all in my latest blog.
Limited Personal Liability: Only the LLC is liable for the debts and liabilities incurred by the business — not the members(“owners”). The members liability is limited to the personal interest they have invested in the company thus the personal assets of the individual member are protected because they are separate from the LLC.
Taxation: The LLC typically does not pay taxes for itself. Instead, the net income/loss is "passed through" to the personal income of the owner(s)/member(s), and is simply taxed as personal income. Federally, LLC taxation is handled very much the same as a partnership or sole proprietorship, in the case of a single member LLC.
Lack of Ownership Restrictions: The LLC does not have any residency or citizenship ownership restrictions, which allows foreign nationals to have ownership in an LLC, if desired. In addition, a corporation or another LLC may have ownership in the LLC
Flexible Tax Status: LLC can choose how it is treated as a taxable entity. An LLC is, by default, federally taxed as a partnership (in the case of a multi-member LLC) or as a sole proprietor (in the case of a single member LLC). The LLC, however, may elect to be taxed as a C- or S-corporation at any time the members so choose.
Flexible Profit Distributions: The members of an LLC may choose how the net income/profits of the LLC may be allocated to its members - even in different proportions to their ownership percentage in the LLC. A corporation, instead is required to distribute profits exactly accordance with the proportion/percentage of ownership of each shareholder.
Easy Compliance Requirements: LLCs enjoy limited state mandated annual filing requirements and ongoing
formalities. LLC’s are not required to have an annual meeting of directors and shareholders, adopt bylaws, and keep minutes of all meetings and all formal corporate resolutions. The LLC members may hold meetings and document the meetings whenever they wish.