LLC vs. Corporation vs. Sole Proprietorship

As entrepreneurs, we must understand the different forms of business entities that exist. It is important to choose which is best for you and your business idea. At this point, a business model should be the sole guide to assess which entity you would like to create!

Let’s start simple.

Limited Liability Companies (LLCs) are one of many structures that can be formed when looking to start a business. This entity type is among the most popular in today’s market economy as it provides the most protection and flexibility.

To differentiate the entities, you must understand the different structures which organize them and the documents filed with the state.

By definition, a Limited Liability Company (LLC) is a company structure meant to protect the owner(s) or founding member(s) from the potential liabilities of running the business. An LLC is appropriately named as it limits the liability of risks that a business may accrue. However, the main differences lie in the terminology, taxation, liability protection.

Taxation

LLC’s are not subject to double taxation like Corporations. This means that LLCs are taxed when the member(s) file their own personal taxes. This is also known as “pass-through taxation”.

Limited Liability Protection of Personal Assets

A business in the eyes of the law acts as an “artificial person” which can, in turn, be sued. There are many liabilities that may happen for businesses that can arise over time. Therefore, when sued, the petitioners/creditors can only sue for the existing assets of the LLC as an artificial person. Those personal assets held by the individual members themselves are noted as separate and not considered part of the business.

In layman’s terms, when you sue an LLC, you sue the “artificial person” and not the members.

The members continue to keep their personal assets.

A Corporation is the second most popular form of entity formation and is what comes to mind when people think of a “business”. This business structure is set by the Bylaws of the company in which ownership is based on shares/stocks. The largest existing businesses today happen to be corporations, run by an entire Board of Directors (also known as “Executives”) and Officers.

The Board of Directors holds board meetings that essentially run the business.

Elections are a part of how the Board of Directors is decided.

Corporations are very formally structured and not very flexible when it comes to the distribution of profits and more. 

Taxation

As previously mentioned, Corporations do suffer from double-taxation. This means that when it comes to filing for taxes, the Corporation must file its own taxes in which they must pay federal corporate taxes and each shareholder or individual will also file/pay taxes.

By definition, an individual person chooses to form a business and operate it by themselves. These businesses can be filed with the state, but do not have to.

Similar to LLCs, these are very flexible business entities because there is no formal Board of Directors, no need for meetings, or structuring documents like Bylaws (for Corporations) or Operating Agreement (for LLCs). As a sole proprietor, you have the right to run your business as you see fit.

Taxation

The IRS and the State will view this business as a part of or extension of yourself. This means that you will be taxed when you file your own taxes.

No Liability Protection At All

There is no differentiation between your business and yourself. If sued, you will be sued for your own personal assets. Hundreds of thousands of businesses are sued every day so if you DO NOT have the capital, it is not recommended to do a sole proprietorship.