Single-Member LLC vs. Sole Proprietorship
Unlike a Sole Proprietor which is an unregistered business entity using for the most part the single owner’s name, a Single-Member LLC registers the business entity with the state and separates the personal assets of the single owner from that of the business. For legal purposes, this separation provides a shield of protection against the owner’s assets, should the business become liable for its debt obligations. In other words, the owner of a Single-Member LLC business that is properly maintained may not be personally liable for the business debts.
The asset protection that the LLC can provide also helps business owners gain greater access to small business loans and credit financing, as the business would appear to be more stable to lenders and vendors. Your Single-Member LLC business also gains a higher level of market credibility over that of a Sole Proprietor.
What are the downsides of a Single-Member LLC?
Starting an LLC is relatively more difficult than creating a sole proprietorship (it’s not a downside though!). You can start a sole proprietorship with your Social Security Number (no need to register your business). But to form an LLC, you need to register your business with the Pennsylvania Department of State and pay the $125 registration fee. So, the registration process is not a downside but if you are not sure about the longevity of your business and you want to test the waters then you should consider starting a sole proprietorship.
“if the single-member dies, the LLC will have to be dissolved”
The downside of forming a Single Member LLC is that if the single member dies, the LLC will have to be dissolved unless an operating agreement clearly defines a representative to take over the business.
What to consider when choosing between a Single-Member LLC and other business entities?
When making your choice in selecting your single-member LLC, you should also consider the owner control and tax implications as well. By default, the IRS taxes the Single-Member LLC the same as a sole proprietorship where the tax obligation for the business income or loss is passed through to the owners and reported on personal income tax returns. Typically, LLCs do not pay taxes at the business entity level. In addition, the Single-Member LLC owners have the option to be taxed as a C-Corporation or as an S-Corporation.
When deciding on setting up a Single-Member LLC, consider your business needs and objectives. If you are testing the waters for your new business, the Sole Proprietorship will provide a simple and cost-effective way to enter into the venture. However, if you intend to develop a lasting brand image and seek funding, the Single-Member LLC may be your best route.
Our consultants here at the SBDC are ready to help you whether you are looking to start an LLC or a sole proprietorship. Reach us at duqsbdc@duq.edu or call us at 412-396-1633.
Next Steps
Our consultants here at the Duquesne University Small Business Development Center can assist you. We offer no-cost business consulting in Southwestern PA. You can request consulting here.
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