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What is the difference between a business being sole proprietor and a Limited Liability Company (LLC)?

Sole Proprietor

The majority of all small business start out as sole proprietor. These businesses are owned by one person, usually the individual who has day-to-day responsibility for running the business or it can also be for a partnership. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the view of the law and the public, you are one in the same with the business. Currently used by more than 75 percent of all businesses, it is often the suggested way for a new business that does not carry great personal liability threats. The owner simply needs to secure the necessary licenses, tax identification numbers, and certifications in his or her name, and you are now in business.

 
Advantages
  • Easiest and least expensive form of ownership to organize.
  • Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
  • Sole proprietors receive all income generated by the business to keep or reinvest.
  • Profits from the business flow-through directly to the owner's personal tax return.
  • The business is easy to dissolve, if desired.
Disadvantages
  • Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
  • May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
Sole Proprietor licenses are issued by the Town only.
 
Limited Liability Company (LLC)
It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
 
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.
 
Advantages
  • Owners have limited personal liability for business debts even if they participate in management
  • Profit and loss can be allocated differently than ownership interests
  • IRS rules now allow Limited Liability Corporation (LLC) to choose between being taxed as partnership or corporation
     
Disadvantages
  • More expensive to create than partnership or sole proprietorship
  • State laws for creating Limited Liability Corporation (LLC) may not reflect latest federal tax changes
LLC licenses are issued by the State and do not have to be registered in the town.