When it comes to forming your business, you’ll need to figure out how you want to register and incorporate your organization. Though there’s no right or wrong answer, some formations are better than others, especially if you’re opening your business entirely on your own. Two of the most common options are to operate as a sole-proprietor or incorporate as a limited liability company (LLC).
What Is an LLC?
An LLC is a type of business organizational structure that can be established by one or more people for businesses in just about every sector. It’s recognized as its own entity under state law and owners have complete control over how the business is managed, operated, and more. The main purpose of an LLC is to protect the business owner’s liability by separating the business’s assets from the owner’s personal assets.
If the business struggles and a creditor pursues settlement of debts, they cannot go after the business owner’s personal assets like their home, vehicle, or possessions to settle that debt.
What Is a Sole-Proprietorship?
A sole proprietorship is a type of business owned and established by a single person and is one of the easiest types of businesses to form. This is the most common organizational type as it’s typically the default classification for single-person businesses. Unlike LLCs, there is no legal separation between the business and the business owner. Any personal assets can be used to settle outstanding debts and the full brunt of liability lies on the business owner’s shoulders with minimal legal protections.
The Differences Between the Two
LLCs and sole proprietorships may both work for single-person businesses, but their differences may make one better than the other for some business owners. Here’s what you need to consider before choosing a classification.
Ownership Classification
LLCs are viewed as a separate business entity that’s independent of the owner. Sole proprietorships do not offer that separation. Instead, the owner and the business are considered one and same under the eyes of the law. Because there’s no formal distinction between the individual and business, sole proprietorships are easier to form and are typically the most common option.
Liability Risk
The main purpose of an LLC is to protect the business owner’s personal assets. Once formed, personal assets cannot be used to settle the business’s debts. With a sole proprietorship, there is no such protection. Personal assets can be used to settle business debts if creditors demand it.
Expansion Potential
LLCs can be formed by a single individual, but they can also accommodate multiple business partners and owners. If a business decides to expand and add partners or co-owners, LLCs allow for those changes. Sole proprietorships are only available to individuals. If a business wants to expand or add co-owners and partners, the sole proprietor will need to restructure their business.
Not Sure Which to Choose?
Picking an organizational structure for your new business can feel overwhelming, and while you’re not locked into a specific structure, it helps to weigh your options before filing the necessary paperwork. The best way to make sure you understand how each structure will impact your business both immediately and in the long term is to work with an experienced Albany business attorney. Contact Gold Law Firm today and schedule a consultation.