Like any business person, it is important to consider appropriate liability and other forms of insurance to help protect your personal assets and your business.
Since federal income tax treatment is similar, this factor may not play a major role in choosing between a sole proprietorship and LLC.
301.7701-2 lists the following six characteristics in determining whether a business is subject to corporate taxation: (1) Associates (2) An objective to carry on business and divide the profits (3) Limited liability (4) Continuity of life (5) Free transferability of interest yes is more big pdf (6) Centralized management.
For federal tax purposes, a sole proprietors income is taxed on an individual income tax return.
Secondly, expansion of the business with management process and organizational behavior pdf additional equity holders is difficult because it requires at a minimum a change of form from a sole proprietorship to a partnership or a conversion to a corporation or a Limited Liability Company.A single-person LLC should choose their LLC activity on their tax return. The owner is taxed for the business as a part of his or her individual assets.On the other hand, an LLC is a separate legal entity and an LLC member is normally not personally liable for the LLCs debts or legal liabilities.Multiple member LLC's are treated as a partnership and file a US Partnership Tax Return Form 1065.Unless the business is a professional practice or other small service business, it is probably advisable to have a durable entity such as a Limited Liability Company or corporation.As a budding entrepreneur, you may face the issue of whether to start out as a sole proprietorship or a limited liability company (LLC).Theyll have to pay self-employment taxes like a sole proprietor.Personal Liability for Employment Taxes.Members of the LLC can quit by transferring their shares instead of shutting down the business, ensuring the continuity of the LLC.
Because these fundamental rules have been established over a long period of time where taxpayers tried to classify entities as corporations, and the Internal Revenue Service tried to compel pass-through entity, the regulations favor pass-through status.
Sole Proprietorship, a sole proprietorship is a simple arrangement where the individual and business are one.
Lets take a look at the tax implications for a sole proprietor vs LLC.
Sale/Transfer of All or Part of the Business.
It also impacts the taxes they have to pay.You must draft and file articles of organization and pay a filing fee which can be hundreds of dollars in some states.Taxation of Your Business.A Limited Liability Company (LLC) is a relatively new type of hybrid business structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.Infusion of partners automatically converts the Sole Proprietorship into a General Partnership, and most banks or other investors remain reluctant to extend loans to an unregistered entity such as a Sole Proprietorship or General Partnership. The owner is responsible for all debts and assets and there are no distinctions between the entities.You wont have to consult with or receive prior approval from other owners on your business decisions.A sole proprietor isnt treated as a separate business entity from the owner.