One of the first things you’ll have to decide when you’re opening a business is what type of legal structure it will have. Many small businesses are set up as sole proprietorships or limited liability companies.
There are some very important distinctions between these two business types. Consider these points before you decide what structure is right for your company.
By definition, a sole proprietorship can only have one owner. If you want to involve a second person in the ownership of the business, you would need to consider a partnership or another type of business structure. An LLC can have multiple owners, known as members, but they can also have one owner who just wants the protection that the LLC structure provides. An LLC with two or more members is typically considered a multi-member LLC. Members can be individuals or other entities, such as corporations or other LLCs.
In a sole proprietorship, the owner has unlimited personal liability for the business’s debts and obligations. This means that the owner’s personal assets, such as their home or car, may be at risk if the business faces financial or legal issues. An LLC provides limited liability protection for its members. This means that, in most cases, members cannot be held personally responsible for the business’s debts and liabilities. Their personal assets are generally protected from the financial and legal issues of the business.
Formation and Compliance
A sole proprietorship is the simplest business structure to form and does not require registration with the state. However, you may need to register a fictitious business name (also known as a “doing business as” or DBA) and obtain any necessary permits or licenses before you begin assisting clients or customers.
Forming an LLC requires filing Articles of Organization with the state and paying associated fees. You may also need to create an Operating Agreement, which outlines the roles, responsibilities, and ownership percentages of the members. LLCs may have additional ongoing compliance requirements, such as annual reports and fees, depending on the states in which they operate.
There are other considerations, such as how taxes are handled, that you should contemplate when you’re opening a business. Ensuring you choose the best structure and complete all necessary tasks to legally operate your business in addition to reviewing your rights and responsibilities as a business owner with an experienced legal professional can give you a solid foundation for success.