What is an LLC?
A limited liability company, or an LLC, is a business structure that allows owners to avoid business liability. This means that business owners in an LLC will not be personally liable for the company's debts or liabilities.
There are many advantages of forming an LLC with the first being limited liability protection to its owners. LLCs also have better tax flexibility than other businesses and fewer corporate formalities. The main disadvantage of an LLC is that profits may be subject to self-employment taxes.
What is a Sole Proprietorship?
Sole proprietorships are also referred to as a sole trader or a proprietorship. These businesses are unincorporated and only have one owner. If you operate a Wyoming sole proprietorship then you will pay personal income tax on profits earned from your business.
Sole proprietorships have a few key advantages over other business entities. The first is that they are easy to form with no formal process of registration. Additionally, as an owner, you will hold sole control of the business profits. The main disadvantage to a sole proprietorship is that you will be personally liable for all business losses and liabilities of your business. This can put you at risk if someone were to sue your business.
LLC vs Sole-Proprietorship
One of the key benefits of a Wyoming LLC over a sole proprietorship is that your liability is limited to your investment in the LLC. This means that you will not be personally liable for the debts of the LLC. The difference with a sole proprietorship is that you will be liable for any debts incurred by the business.
There are cases where this liability protection can be revoked though, that is if you treat the LLC in the same method as a sole proprietorship. This would result in a loss of liability protection.
An LLC is a hybrid of a sole partnership and corporation. This provides you the protection of a corporation with the tax advantages of a partnership.
Typically a sole proprietor will not have employees and will run a small or part-time business. It costs nothing to establish a sole proprietorship. Although you may need licenses, permits, and other permissions, to simply form the entity you do not need to go through anything. An LLC does come with a variety of costs. Essentially, you can simply decide to have a sole proprietorship, while an LLC requires you to jump through legal hoops and file different forms of paperwork such as filing a business name, choosing a registered agent, and filing a certificate of formation.
Whether you have a sole proprietorship or an LLC, there will be changes in your taxes. The first thing you will need to do in either situation is to separate your personal and business finances.
If you choose to be a sole proprietor, then you may qualify for something called filing pass-through taxation. This will save you some amount of money in self-employment tax, but your tax rate will depend on your business type. It is also a bit easier to file taxes as a sole proprietor, but you will still be required to pay taxes on your own.
If you choose to form an LLC, you may be able to cut your tax bill. The only reason this would be possible is if you are filing as a multiple-member LLC. Otherwise, you will be taxed as a sole prop or single-member LLC.
Overall, filing an LLC will always protect you more personally from business liability. LLCs, ensure that you will not be liable for any of your company’s debts. As a sole proprietorship, you will be fully responsible for the debts incurred by your business. You should always hire liability insurance in case something occurs, to protect your personal liability.
Managing and Operations
Running a sole proprietorship is much more simple in terms of managing operations. All you need to keep in mind is to track your income and keep it separate from your personal finances. Typically you will not have employees, and only need to monitor your own choices.
LLCs often encompass multiple individuals, and might even have employees. When forming a Wyoming LLC you should also plan to create an operating agreement. This will allow you to govern your LLC with a specific set of rules that will need to be followed.
LLC & Sole Proprietorship Taxation
If you operate your business as a sole proprietor, then you will be taxed as a self-employed person. This means that any and all of the income of your business will be considered your personal income for tax purposes.
When operating as an LLC, you can decide if you want to be taxed as a corporation. If an election is not made, then you will be taxed as a proprietorship or a partnership. This specifically depends on the number of members that make up the LLC.
Should You Start an LLC or Sole Proprietorship
If you are on your own and want to start a business, you may think that you should start a sole proprietorship. This can be appropriate if you have no employees and if you are doing a low amount of business, but as soon as the business has one paying client, you will be at risk for liability.
This is why it is always a better choice to form a Wyoming LLC. Not only does it provide a better tax requirement, but also provides personal legal protection. If you are on the fence between the two contact us at Wyoming Trust & LLC Attorney to gain more information about which is best for you.