Sole Proprietorship vs LLC – What’s Best for You?

by Derek Jones, 9 minutes read
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Sole Proprietorship vs LLC – What’s Best for You?

What is a Sole Proprietorship?

A Sole proprietorship is one of the simplest forms that a business can take and is defined as a business that legally has no separate existence from its owner. An example of this can be seen in how the income and losses of the business are taxed on the business owner’s personal income tax return. Keep in mind that a Sole proprietorship is not a legal entity and is just a term used to refer to the person that owns the business and is responsible for all of its debt. It can operate under the name of the owner or under a company name like Benny’s Pizzas. Whichever name you do choose to go with, remember that it’s only considered a trade name and does not create any type of legal entity that is separate from the Sole proprietor.

What is an LLC?

An LLC, on the other hand, stands for a limited liability corporation and combines elements of a corporation and a Sole proprietorship business. An LLC is commonly considered to be one of the least complex business structures and is known to provide plenty of flexibility. Unlike a Sole proprietorship where the owner is primarily responsible for the debts of the business, in an LLC, the entire business is responsible for the debts instead of a single person. This means that in most circumstances, the members of the LLC are protected from any debts as well as any lawsuits.

Now that you’re better acquainted with what a Sole proprietorship is, as well as an LLC, let’s take a look at why it’s so important that new business owners understand the differences and similarities between the two.

Sole Proprietorship vs LLC

Trying to start a new business is already hard enough, you have a million and one things going on all the time and right when you finally feel like you’ve got a grasp on things and can relax a bit, another issue is thrown in your face out of nowhere and you have to get right back to the grind. Whether it be dealing with lazy contractors, trying to secure that precious loan from the bank, or trying to put together a team of managers to help run your store, there will be plenty of roadblocks you’ll have to overcome to ensure you build a thriving business.

Sole Proprietorship vs LLC - Which is Best for You

One of those roadblocks is having to distinguish your business as either a Sole proprietorship or as an LLC (limited liability corporation). While it may not seem as significant as securing a space or finding a good accountant, the decision of choosing to be a Sole proprietorship versus being an LLC will have large effects that will echo throughout your business. Some areas of your business that will be impacted are your tax benefits, the people who’ll be liable to pay the loan back, as well as the personal assets of the business owner. If you’re still on the fence on which of the two would be the best fit for your business, continue reading as we give the advantages and disadvantages of both so you can be assured in whichever side you choose for your business.

No matter whether you file as a Sole proprietorship or as an LLC, you’ll need an employee scheduling platform that will optimize the way you build and send out your employee schedules. Stick with inefficient scheduling procedures and you’ll be stuck spending precious time that you could have invested in bettering your business. To learn more on how Deputy works as a key to better employee scheduling procedures, click on the button below to begin your trial and see the benefits for yourself.

Sole proprietorship vs LLC: Taxes

First and foremost, you can’t have a conversation about the similarities and differences between Sole proprietorship and LLC without bringing up the tax benefits (and disadvantages!) that come with both sides.

Taxation for a Sole Proprietorship

One of the biggest drawbacks of going the Sole proprietorship route for your business is that you’ll be seen as the same entity as your business. Which means that you’ll become personally responsible for all of the debts of the business, as well as for obligations like taxes. Also, all of your business’s income that’s earned gets directly passed through you, as well as all expenses that are incurred while running your business, which means that you have to file all of these figures on your personal tax return.

Sole Proprietorship vs LLC - Which is Best for You

Being a Sole proprietor means you’ll file your net business income or losses on Schedule C or C-EZ, which both go along with Form 1040. If you’re curious to know your rate of taxation as a Sole proprietor, it will be equal to your individual tax rate (not a corporate tax rate). Along with all of that, you’ll also have to pay self-employment tax on your net business income. All in all, paying taxes as a Sole proprietor is very straightforward and simple due to not having to pay separate taxes for the business. There are no special tax forms with the state or federal government and the only form that a Sole proprietor will have to file with the IRS is a Schedule C, which is part of their annual Form 1040.

Taxation for an LLC

Unlike a Sole proprietorship, which is taxed in a single way, an LLC has the option of being taxed as a Sole proprietorship, a partnership, or a cooperation. It’s important to know that the only way for an LLC to be taxed as a corporation is if they specifically elect to do so. If not, they’ll be taxed as a Sole proprietorship or a partnership depending on how many members they have.

With you now being better familiarized with the tax situations associated with both a Sole Proprietorship and an LLC, let’s move into the advantages and disadvantages of both.

Benefits of a Sole Proprietorship

While a Sole Proprietorship may come with a number of tax benefits, there are many other benefits that business owners can come to expect when choosing this route for starting their business. Make sure to pay close attention to assure that these benefits are a good fit for you as a business owner.

  • Being in Full-control

One of the biggest benefits of being a Sole proprietor is that you have absolute control over your business and know that all major decisions regarding your business will ultimately come down to you, which means that if you’re interested in adding a new menu item or changing your shop’s operating hours, you won’t have to worry about getting the approval of any other partners, investors, shareholders, managers, etc. You’re free to add whatever menu item you like along with changing your shop’s operating hours to your exact specifications.

While this will definitely be seen as a large benefit for a number of business owners, don’t assume that having total control is always a good thing. Many business owners will find that they prefer having a team of different minds together where they’re able to bounce ideas off of each other during the decision-making process. So it’s important to take the time to properly analyze whether or not you like the idea of being the end all and be all of your business. While the initial idea may sound attractive, you may come to find that you prefer having a team of advisors or co-owners around you that are making their own informed decisions based on their personal investments in the business.

  • Can sell or transfer the business whenever you’d like

You go through the troubles of planning your business out as well as getting your shop up and running. It was a struggle but you went through the hardship and are now seeing a decent amount of growth. Only issue is that you really aren’t enjoying the life of being a business owner as much as you thought you would and are starting to miss being an employee that doesn’t have to worry about managing a fully operational business. You’ve come to the conclusion that the life of a business owner isn’t a good fit for you and you make the decision to sell the business to the highest bidder.

Sole Proprietorship vs LLC - Which is Best for You

This is one of the strongest benefits of being a Sole proprietor, if at any time you feel like the life of a business owner isn’t for you, you’re free to sell or transfer the business to whomever you’d like. While you may currently feel like you will never want to sell your business, you never know what the future may hold. You may decide to start a family, choose a different career path, do some extensive travel, etc. these are all decisions that can seriously affect your desire to want to continue running your business.

  • Cheaper and simpler to start

There is a lot of red tape that you’ll have to deal with when starting your business, regardless of whether you choose a Sole proprietorship or an LLC. But you should know that going the Sole proprietorship route is much less of a hassle than an LLC would. This is because starting a Sole proprietorship means that there are fewer forms to complete and next to no government fees that you’re required to pay. Along with that, they’re not required to file any annual reports with the state or federal government.

Benefits of an LLC

Now that you’re filled in all of the advantages that come with filing a business as a Sole proprietorship, it’s only fair that we do the same for the other side and analyze the benefits of an LLC. Although you may already be sold on the idea of a Sole proprietorship, you may be pleasantly surprised at the pros that come with starting an LLC.

  • Less personal liability

Although we touched on this a bit above, it’s worth it to go deeper in detail. In a Sole proprietorship, the business owner and the business are seen as the same entity in the eyes of the law. So if the business ends up drowning in major debt, that debt can end up falling on the lap of the business owner. Not only that but if you went into a Sole proprietorship with a business partner and they end up getting accused of negligence, your personal assets may end up being put at risk.

By choosing to go with an LLC, your personal liability in the company will be limited due to the LLC being legally separate from its owners. LLC’s are responsible for their own debts and obligations, and assets like your home, car, personal bank accounts, etc. can’t be used to collect on the business debts.

  • Flexible distribution of business profits

Many businesses may find that they prefer not to distribute profits equally amongst their owners, they may prefer an unequal distribution or some other formula that doesn’t rely on ownership percentages. For example, say two women started a bar that went on to reach a reasonable level of success in their area. But during one year, one of the women gets pregnant and has to take a couple months off to care for the child and to take it easy while she’s pregnant.

Sole Proprietorship vs LLC - Which is Best for You

Because of this, the women that was pregnant with the child chooses to hand over a good chunk of the bar’s profits to the other woman because she was the one that was holding down the business while she was gone taking care of her pregnancy. This situation displays exactly why an LLC can come to be such an advantage for business owners that want a more flexible set-up for their business.

  • A heightened sense of credibility

When you think of a well-established business, you think of a business with an LLC. That’s why having an LLC can work as an advantage for your business in the long run. Potential customers, employees, vendors, investors, etc. will be more likely to take you seriously and see your business in a positive light if you obtain an LLC.


Starting a business is hard enough, don’t make it worse for yourself by filing as an Llc when you should be a Sole proprietorship and vice versa. While it may not seem like such an important decision at first, it will ultimately have a larger impact than you would expect.

No matter whether you go with a Sole proprietorship or an LLC, you’ll need a reliable employee scheduling platform like Deputy that allows you to quickly and easily build and send out schedules to your entire team. To learn more, click on the button below to begin your trial.