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How Do I Decide between Forming an LLC or Sole Proprietorship?

Article Details
  • Written By: Autumn Rivers
  • Edited By: Angela B.
  • Last Modified Date: 04 November 2016
  • Copyright Protected:
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    Conjecture Corporation
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Two of the most popular types of businesses are a limited liability company (LLC) and a sole proprietorship. If you are having trouble choosing which type to form, you should first consider the financial aspects of this decision. For example, if you will need a lot of money to start the business, an LLC is often preferred because it is easier to get investors, but it also costs money to form. Another detail to think about when deciding on an LLC or sole proprietorship is whether you intend to sell the company in the future, because an LLC is usually easier to transfer to a new owner. Additionally, think about the likelihood of being sued in your industry, because your personal assets can be taken during a lawsuit when you run a sole proprietorship, while just the company's assets can be seized if you own an LLC.

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Money is one of the most important aspects to think about when deciding whether to form an LLC or sole proprietorship. For instance, an LLC is usually better for getting investors, because you have the ability to sell membership interests if you need funds quickly. On the other hand, an LLC typically costs more money to set up. You would have to pay formation fees, yearly state fees and filing fees, which means there are both upfront and ongoing costs associated with this type of business. Before you decide whether to create an LLC or sole proprietorship, know that you can expect to pay very little when setting up the latter, because the main expense of a sole proprietorship typically is filing a Doing Business As (DBA) form when you wish to call your business something other than your given name.

If you plan to sell your business someday to make a profit, you are typically advised to form an LLC. This is because LLCs can usually be sold to others without interrupting the business operations, while sole proprietorships cannot be sold as-is. Instead, their assets and any permits have to be separately transferred to the new owner, which typically results in more work and interruptions for the business.

One of the most common ways of deciding whether to create an LLC or sole proprietorship is to consider your chances of being involved in a lawsuit. This is because lawsuits against LLCs only involve the business assets. If your LLC gets sued, you might lose the company but your personal assets will usually be safe. With a sole proprietorship, your personal assets can be taken away if you owe a customer or lender money. Of course, some industries have a higher chance of lawsuits than others, which is why you should consider your chances of a customer being injured or financially harmed by your business before you decide whether to form an LLC or sole proprietorship.

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