What are the differences between an LLC and a sole proprietorship?

A:

We often are asked this question by sole proprietors. This is a good question to ask when considering whether you should change from a sole proprietorship—also known as an independent contractor, freelancer, or self-employed person—to form a limited liability company (LLC). 

Some of the differences between a sole proprietorship and an LLC are listed below.

Sole Proprietorship:

• The business is owned by one person and is unincorporated.
• It is neither a partnership nor a corporation.
• The business reports its income and expenses on a Schedule C for income tax purposes.
• The business may need to complete other forms—such as Schedule SE, Form 8829 and Form 4562—in addition to Form 1040.

Limited Liability Company:

• An LLC is a legal entity.
• An LLC must file documents with your state’s business department, also known as the office of the Secretary of State.
• It can be owned by a single person or by multiple people.
• An LLC can choose how it wants to be taxed: as a sole proprietorship, corporation, or partnership.

Because everyone’s situation is unique, there are some scenarios where it may be in the business’s best interests for a business owner to remain a sole proprietor rather than becoming an LLC. However, there certainly are benefits for some to convert to an LLC. To find out what would be in your best interests for both legal and tax purposes, we encourage you to consult an Austin business entity attorney before making an entity change.

Call the Posey Law Firm toll-free at 888.269.1962 or locally at 512-646-0828 today to speak with a Texas business attorney knowledgeable in choices of entity.

Jake Posey [email protected]

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