Which is the Best Business Structure in the USA? LLC or Sole Proprietorship
Whether you are a startup or have a growing business, choosing the right legal structure is important. It is likely to influence a number of factors, such as your day-to-day business operations, business control, potential risks, ability to attract investors, personal liability, and how much tax to pay. Therefore, choose a business structure in the USA that provides the perfect balance of benefits and legal protection.
In the U.S, there are primarily five business structure options – Sole Proprietorship, Corporation, Partnership, Cooperatives, and Limited Liability Company (LLC). However, in this blog, we will discuss the most common legal structures – Sole Proprietorship and LLC. This will help you determine which is the right business structure for you.
Business Structure in the USA – Major Types
If you are wondering how to form a company in USA, this guide will help you compare Sole Proprietorship vs. LLC – allowing you to pick the right structure for your business.
1. Sole Proprietorship
Sole proprietorship is a form of business entity that is owned and run by a single person. It is an ‘unincorporated’ business and there is no legal distinction between the owner and the business. That means your personal assets and liabilities are not separate from your business assets and liabilities. And this can become a problem later as your business expands, and you tend to hold more liabilities.
However, this form of business structure in the USA is simple and straightforward. You are your own boss and enjoy complete control of your company. With sole proprietorship, you are responsible for all the profits…and debts.
Discussed here are the pros and cons of sole proprietorship:
- You do not require any state paperwork when setting up a sole proprietorship, except industry-specific licensing. It is the simplest legal structure in the USA and easy to set up
- Since you and the business are a single entity, you are likely to enjoy certain tax deductions. Additionally, the profit & loss is passed via your personal tax return. As such, you are liable to pay only personal local, state, federal, and Federal Insurance Contributions Act (FICA) taxes. There is no obligation to pay unemployment or business taxes.
- This form of business structure in the USA is low cost and easy exit. You can dissolve the business at any time without the need to submit any formal paperwork
- There is no liability protection, and this can put your personal assets at stake
- Hard to build business credit to avail debt financing
- Inability to attract equity financing because not many investors tend to invest in sole proprietorships
2. Limited Liability Corporation (LLC)
LLC is a hybrid business structure in the USA that enables owners, shareholders, and partners to enjoy more flexibility and tax benefits, while limiting their personal liabilities. According to the CEO of ProStrategix Consulting – Brian Cairns, “Limited liability companies were created to provide business owners with the liability protection that corporations enjoy while allowing earnings and losses to pass through to the owners as income on their personal tax returns.”
An interesting feature is that an LLC may have more than one member, but the profits and losses do not necessarily be divided equally among all members. Discussed here are the pros and cons of Limited Liability Corporation.
- LLCs have a greater market credibility and a separate business entity. As such, they are likely to attract more investors for equity financing
- Liability protection against lawsuits, commercial debts, and other obligations
- You will enjoy all tax benefits and added flexibility of being self-employed.
- You need all state-related paperwork as well as industry-specific licensing documents to set up an LLC. Additionally, you will also require annual state filings
- In addition to personal local, state, federal, and FICA taxes, you may also need to pay unemployment taxes and state business taxes
- Cost of running and completing tax return is much higher for an LLC than sole proprietorship
Company incorporation and registration in the USA can be a complex process. Therefore, it is crucial to get expert advice to understand which is the best business structure in the USA and how to get started.
Liberty Business Team Is Ready to Help You!
To start and run your business in the USA, you need a lot of documentation to be prepared. When applying for a U.S permanent worker visa or any visa, we can help you. You cannot be an expert in every subject you need. An expert consulting firm you can trust will save you time and money. For your U.S. trademark registration, our business consulting team can help you avoid any possible problem.
Comprised of experienced business attorneys, marketing experts, and business advisors, Liberty Business has the answers to any questions or needs a blossoming business may have.