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Should you form an LLC or a sole proprietorship?

On Behalf of | Jan 25, 2024 | Business & Commercial Law

The timing and funds are all in place, making your dream to start a business a reality. However, before you can begin operations, you must consider the legal structure that is best suited for your business. However, the varying types of business entities can make it difficult to determine what type is best for you, your business and your future needs and goals.

Often, individuals and business partners will consider the personal liabilities they could face due to their business. Protecting personal assets from business debts and liabilities can be an important factor to consider when considering whether to start a sole proprietorship or a limited liability company or LLC.

Creating a limited liability company

As the name suggests, this type of business entity provides personal liability protections. This is due to the LLC being a separate legal entity. As such, personal assets are kept separate from business assets. Whether there is just one member or more than one member, each member enjoys the benefit of limited liability provided by an LLC.

If you seek to create an LLC, it is important to understand all the steps required. This includes naming the legal entity, filing articles of organization, creating an LLC operating agreement, pay fees associated with any filing and complying with any rules governed by state law.

Starting a sole proprietorship

Unlike an LLC, a sole proprietorship does not have limited liability. In other words, your personal assets could be used to address business debts or obligations. As such, it is important to consider how risky your business could be when determining whether or not you should take steps to protect your personal liabilities.

One benefit of starting a sole proprietorship is that you do not have to file any documents with the state. Thus, you do not have to pay any filing fees. It should be noted that your legal name is the business name by default for a sole proprietorship. Thus, you might have to file a doing business as or DBA under a different name. It should be further noted that there is a filing fee for those registering a fictitious business name for their sole proprietorship.

Although simplified, the creation of an LLC and sole proprietorship were described. Because they differ in various ways, it is important that you seek legal guidance to help you gain a better understanding of your situation and what business structure is best suited for you.