As a business owner, it is sometimes difficult to decide how you should structure your business to make it as easy to operate as possible, but also as profitable as possible. There are several different types of legal business structures that you may consider when starting your business. It is important that you have a basic understanding of each before deciding which structure to use for your business.
While there are many legal business structures available, this article focuses only on the differences between sole proprietorships and limited liability companies (LLCs). This is because these two business entity structures are the most common and lend themselves most readily to small businesses.
A sole proprietorship is perhaps the simplest form of business entity structure, and can essentially be defined as a business that is owned by a single person without any formal business structure. If you operate as a sole proprietorship, you are probably just an individual doing business and offering products and/or services to others.
In many cases, you may be operating under a trade name, “Bob's Auto Body Shop,” for example, which you may have registered with the state. But, just because you are operating under a registered trade name doesn't mean that you have any specific legal business entity structure.
If you are the sole owner of a business and you do not officially register it as a business entity, it will be considered a sole proprietorship by default. As a sole proprietor, all of your business income is taxed as your personal income. Furthermore, any debts or liabilities incurred by the business are also your personal debts and liabilities.
Lack of any personal liability protection, whatsoever, is the single biggest drawback to operating a business as a sole proprietorship. Lack of any personal liability protection means that if a lawsuit is filed against your business, you can lose your personal assets to satisfy the lawsuit, along with the assets belonging to your LLC.
On the other hand, perhaps the biggest advantage of operating as a sole proprietor is that it is easy to start. You simply start doing business and you are a sole proprietor. What's more, you can essentially manage your business however you see fit.
Limited Liability Company (LLC)
An LLC is the most popular business entity structure in the country. This is because it combines the most desirable features of other popular business structures, most notably:
- Pass-through taxation and flexible management, like a sole proprietorship or partnership; and
- Limited personal liability for its members/owners, like a corporation.
Limited personal liability is by far the biggest benefit an LLC provides to its owners. This means that, in most cases, your personal assets will be safe from any debts and lawsuits arising out of the LLC’s business activities.
Perhaps the biggest drawback to operating as an LLC is the filing fees and corporate formalities that you must deal with in order to form and maintain an LLC. The filing fee for registering an LLC in Texas is $300.
In addition, if you need to hire a registered agent for your LLC, this will cost another $100- $300 per year. There are also annual fees and other fees that must be paid to keep your LLC’s registration in good standing.
Sole proprietorships are most often appropriate for businesses that do not involve much risk of liability. So, if it is unlikely that a lawsuit will arise out of your business activities, then a sole proprietorship may work for you.
On the other hand, if you are concerned about liability and want to shield your personal assets from any legal issues that may arise out of your business operations, then an LLC may be a better structure for your business than a sole proprietorship.
Nevertheless, any advantages an LLC provides over a sole proprietorship should be weighed against the additional costs and formalities required for operating your business as an LLC.
Consult With An Experienced Texas Business Attorney
Generally speaking, for the vast majority of small businesses, operating as an LLC is better than operating as a sole proprietorship. This is because an LLC offers personal liability protection that you would otherwise not have with a sole proprietorship.
For more information regarding the various business entity structures available for your Texas business, and for help with deciding which one is the right for you, contact us to arrange a free consultation with a knowledgeable and experienced Texas business attorney.