Have you chosen the best business entity for your operation?
By Jennifer Paulson
A 2021 NRHA Professionals’ Survey pointed out that a large number of NRHA Pros operate as sole proprietors. While there are many models under which you can conduct business, the two most common in the survey were LLCs (limited liability corporations) and sole proprietorships. These are also the two most common models for small businesses, no matter the industry. Here are the pros and cons of each so you can consider if you’re doing business in the most efficient manner possible.
This article is not presented as financial advice, but as a starting point to gather information. Please consult your business advisors for the most up-to-date and accurate information regarding your state and business.
What’s the Difference?
Any business owner can form an LLC under their state’s guidelines. It’s owned by one or more members and can appoint a manager to handle daily operations, but this isn’t required. The key is the LLC’s “members” (owners) are not personally responsible for business debts and liabilities. The LLC carries that burden.
A sole proprietorship is an unincorporated business owned and ran by one person—you call all the shots and are truly the single boss. It’s a simple setup, and the owner is entitled to all the business’ profits. However, the owner is also responsible for all liabilities.
Activation
Forming an LLC requires a bit more effort and financial investment at the outset. You’ll be required to file documents with your state that vary depending on your location. You also might be required to pay an initial filing fee that can range from $50 to $500, depending on your state.
A sole proprietorship requires no formal action, unless you’ll do business under a name that’s not your own. Then you’ll need to file a “doing business as” or DBA.
Personal Liability Protection
An LLC protects your personal assets if you find your business under collections or have other claims against it, such as a lawsuit. In most cases, these creditors won’t have access to your home, car, or personal bank accounts. This is a key benefit of an LLC!
This can be the downfall of the sole proprietorship. You’re entitled to all the profits, but you’re also responsible for all debts and can even be held responsible for issues caused by your employees. It’s something to be keenly aware of if you choose this business model.
Mixing Money
If you’re a sole proprietor, comingling business and personal funds isn’t a problem, from a legal standpoint. By law, your accounts are one and the same. But your business consultant will probably advise against mixing money for clean bookkeeping.
In an LLC, all business bank accounts and funds must be separate from your personal accounts. If you don’t, you’re at risk of losing your LLC protection.
Tax Time
One shared key benefit of an LLC and a sole proprietorship: pass-through taxation. This means all profits made are only taxed once and they pass through to your personal taxes.
Under an LLC, you can file your taxes as a sole proprietorship, a partnership, or a corporation. A sole proprietorship can’t file as a corporation.
Finally, if you’re a sole proprietor, you’re not required to pay taxes on the full amount of your income, only the profit of the business.
