Pros and Cons of Sole Proprietorship, LLC and Partnership

Sole Proprietorship

Sole Proprietorship is referred to proprietor meaning. The person who starts the business is responsible for the management, contracts, finances, and business. In this case, this person is the guarantor of his business unit with all his personal property. If his business goes bankrupt, he may lose his home and his life. If this person dies, his business will also be lost. It is the simplest and least expensive type of investment. The proprietor manages his business alone, and reporting tax matters is easy in this case. This is while the responsibilities are all on the investor and he will bear all the profits and losses.

In this type of business, there is no legal distinction between the proprietor and the business itself, and in practice, the owner is responsible for all kinds of financial consequences, including debts, bankruptcy, and the like. Financial institutions and insurance companies also assume these two identities, namely proprietor and business.

Sole proprietorship examples include all kinds of technical professions and any type of self-employment, taxi drivers, home businesses, freelancing and, etc. This type of business is formed whenever a person earns money by doing work or providing services or providing a product to another natural or legal person outside the payroll mechanism.

Despite of the DBA, the sole ownership has a legal structure and a DBA has not.

Sole proprietorship taxes

Note that depending on the financial circumstances of this type of ownership, a person is required to do some form of official registration to do tax work. But as long as the legal nature of the relationship between the proprietor and his business has not changed, doing these formal activities will not change the type of business ownership. The owner of this type of business can deduct the expenses related to his business activities from the annual income.

Sole proprietorship advantages and disadvantages

Advantages of sole proprietorship

1. Simple and cheap start-up

This business requires almost no extra work and no cost. Other related activities such as site development, marketing, etc. depend entirely on the individual’s choice and none of them have a legal requirement. Many people do their business without these tools or through the available free items.

2. Full ownership of the business

In this model, the owner has 100% control over all aspects of his business and does not need coordination and agreement with the other partners.

3. Tax Benefits

Like other types of businesses, the owner can deduct expenses related to his business activities from the annual income and pay taxes only for the remaining amount.

Disadvantages of sole proprietorship

1. High workload

Due to its nature, this model of business can put a lot of work pressure on the owner. The pressure is mostly not transferable to others and sometimes damages the quality of a product/service or even a person’s health.

2. Weaknesses in support systems

Owners of this business are less able to enjoy benefits such as leave, health and leisure services, and the like that other types of businesses provide for their employees. If an accident happens to a business owner, it could jeopardize the overall business revenue, unless methods such as disability insurance have already been considered to reduce the consequences. Some large government organizations, especially in large contracts, are not willing to accept services from individual businesses.

3. Legal Liabilities

Since the business does not have an independent legal identity, any business losses are returned directly to the owner and he must compensate them all. Insurance is usually more expensive for this type of business.

4. Limitation of tax flexibility

Although this business model has tax benefits, it generally lacks the freedom and scope of facilities and flexibility of other types, such as corporate business.

What does LLC mean?

A limited liability company is a company formed between one (called single member LC) and more persons (multi member LLC) for business affairs and each of the partners is responsible for the company debts and liabilities. Their liabilities are only to the extent of their capital in the company without dividing the capital into shares or parts of shares (the main advantage that corporations have). Benefits of LLC include owner’s shared responsibilities about the business turbulences (the main advantage that corporations have). The LLC advantages and disadvantages are provided in the below sentences.

PLLC vs LLC

A PLLC has the same advantages as an LLC but, in a professional limited liability company (PLLC), the owners have licensed occupations and members of a PLLC aren’t personally liable for the malpractice of any other member.

DBA vs LLC

The difference between an LLC and a DBA is about liability. Under a DBA, the proprietor (corporation sole) is liable for all expenses incurred on the business, but an LLC provides limited liability for the partner(s) in the format of single member LLC operating agreements.

LLC VS Sole Proprietorship

There are several similarities and differences between sole proprietorship vs LLC that include:

Is an LLC a sole proprietorship?

Both business entities are governed by specific laws and are controlled by the government. Both have certain risks and uncertainties (such as taxes, changes in sales volume, and overhead costs). Risks may also be caused by unpredictable factors such as trend change and competition. The goal of both is to gain customer satisfaction.

Differences between sole proprietorship and LLC

1. Number of holders

A sole ownership has only one owner, while an LLC has one or more owners, which may consist of companies, foreign businesses, and even partnerships.

2. Start-up capital

There are not many costs involved in starting this business type, other than the cost of obtaining the necessary permits. An LLC cost, on the other hand, includes paying the initial registration fee or filing a case.

3. Tax implications

The proprietor is responsible for all personal and commercial taxes, according to which the business income considers the owner’s income for tax purposes. In an LLC, business income is transferred through partners and is taxed only at the individual level.

4. Responsibility

The proprietor is solely and personally responsible for all financial and legal transactions in the business. However, for an LLC, the owners are fully protected from the responsibilities that may arise from the business.

5. Trade control

A sole proprietor has complete control over the business and is the sole decision-maker. In an LLC, all members have the right to participate in business decisions.

6. Business life

There will be no personal property when the owner becomes incapacitated or dies. But in an LLC, it may exist regardless of the manager or members of the company.

7. Regulations

LLCs are governed by specific state laws that may require an operating agreement. This often leads to additional documentation and records, which must be recorded promptly.

These items contain the pros and cons of an LLC in comparison to the sole proprietorship model in doing business.

Partnerships

A partnership is a business in which two or more people are equally and personally responsible for paying the debts of the company.

Partnership advantages and disadvantages

There are several subjects about advantages and disadvantages of partnership, especially in the establishment, costs, and ownership type. The establishment of these companies is done with an informal agreement and at a low cost while the transfer of ownership is difficult and requires the dissolution of the previous partnership.

In these companies, in case of death or departure of one of the partners, the company is dissolved and the activity of the company ends. The income of a partnership is subject to personal income tax and the capital that can be provided in such companies is limited to the income of the partners.

But the owner’s unlimited liability for the company’s obligations, limited lifespan, difficulty in transferring ownership, and inability to grow due to funding limitations are among the disadvantages of such companies.

Partnership vs LLC

Despite LLC, a partnership is a company that is formed for business affairs between two or more people with joint responsibility. In this type of business, if the company’s assets are not enough to pay all the debts, each of the partners is responsible for paying all the debts.

Unlike a partnership, in a limited liability company, the responsibility of each shareholder for the debts of the company is limited to the amount invested in the company, and in case of bankruptcy, they do not have to use their personal property. Simply put, if the company goes bankrupt and is unable to meet its creditors, only the shareholders’ capital is lost and the creditors can no longer claim the rest of their claims from the company’s partners.

Partnership vs sole proprietorship

A partnership company has the same characteristics as a sole proprietorship, except that it consists of more than one proprietor or partner, and all partners share in the company’s income and expenses. Also, the individual responsibility for the company’s obligations is unlimited and their liability is not limited to the percentage of their share in the company.

Sole proprietorship vs independent contractor

They are essentially the same and are self-employed but, the sole proprietor is a type of business for income tax purposes. On the other hand, an independent contractor is the opposite of an employee, for payroll tax purposes.

(Last Updated On: March 19, 2021)