Starting a business is an adventure, in which the individual must brave all kinds of dangers to achieve success.
Because it is an adventure, most startup businesses start with the simplest format, the sole proprietorship.
Sole proprietors are indeed heroes. They fly under their own flag. They assume all risk themselves. If they succeed, they deserve all kinds of credit.
Be that as it may…
The sole proprietorship may not be the best way to continue. If your business has growth potential, sole proprietors can be overwhelmed by production issues, ready cash, tax questions, and — perhaps worst all — legal liability for debts, defects and broken contracts.
When you are a sole proprietor, there is zero difference between you and your business. Your personal money and your business money flow together. You are on the hook personally for everything that can go wrong in the business.
The relative security of an LLC
With limited liability company (LLC) status, you are still a human being – but your business is something else, an entity distinct from you. It is a kind of hybrid between a sole proprietorship (you still pay pass-through taxes) and the risk fortifications of a full-fledged corporation.
You’re still the hero, but now you have a shield.
What LLCs offer
You now have the flexibility to do many things:
- You can be taxed the way you choose – continuing as a sole proprietor, as a partnership, or an S or C corporation. Flow-through taxation is easy to follow.
- You have much less paperwork and lower filing costs than a corporation does.
- You can stay small, one heroic person or you can expand to unlimited numbers.
- Best of all you are shielded from most liability if the proverbial roof (lawsuits, debts, bad economic luck) comes crashing down you.
LLCs have pros and cons
But LLCs remain a powerful compromise between taking on the world all by yourself (sole proprietorships) and disappearing into the corporate mists.
Talk to us at Sjoberg & Tebelius PA about the right format for your business ideas.