Limited Liability Corporations vs. Sole Proprietorships: Which Is Right for You?
You’re ready to start your own business in North Carolina — you have a product or service ready, a business plan, and a strategy for success. Now, you need to focus on the legal aspects of running your business, starting with choosing a business entity. If you are operating as a single business owner (ie: no partners or shareholders), you are most likely looking at choosing a limited liability corporation versus a sole proprietorship. To help you make the right decision, our business law attorneys at Kirk, Kirk, Howell, Cutler, & Thomas, LLP are sharing each entity’s advantages and disadvantages, and how to choose the best option.
What Is a Sole Proprietorship?
A sole proprietorship is an unincorporated business without a formal legal entity that is owned by a single person. From a legal perspective, there is no distinction between you, the individual, and your business. This means that you are personally liable for any debts, losses, or injury your business may accrue.
How to Form a Sole Proprietorship
There are no actions needed to form a sole proprietorship. As soon as you begin operating your business, you are operating as a sole proprietor. For example, if you are a 1099 employee, freelancer, or you provide a service as a “side hustle,” you’re already a sole proprietor.
However, this business entity does not absolve you from holding any necessary licenses and permits, so it’s important to know what’s required in North Carolina, as well as your county and city regulations so your business operates legally.
Advantages and Disadvantages of a Sole Proprietorship
Now that you have a better idea of what a sole proprietorship is, let’s look at the advantages and disadvantages of choosing this business structure.
Advantages of a Sole Proprietorship
The biggest advantage of operating as a sole proprietorship is the ease of starting your business. As we mentioned above, there are no legal forms, fees, or declarations required to choose this option.
Additionally, operating as a sole proprietor can streamline your taxes. All profits and business expenses “pass-through” the business to your personal tax returns. Instead, profits are considered income and expenses can be deducted, so it can save you time and stress compared to having to pay taxes as another type of structure.
Disadvantages of a Sole Proprietorship
The main disadvantage is your personal financial responsibility. Because there is no separation between you and your business, you can be held liable for any debt, loss, or injury. For example, if your business owes money to a lender and you default, they can sue you for both business and personal assets to recover their loss. Similarly, if someone is injured due to your business, your personal assets could be taken in a civil suit.
To a lesser extent, another disadvantage of choosing this business structure is the challenge of trying to secure funding. Banks tend to turn down loans to sole proprietors because this structure is seen as a greater risk and a higher likelihood of defaulting on the loan.
What Is a Limited Liability Corporation?
A limited liability corporation also called a limited liability company, or LLC, is a business structure in which the owner, or owners, are a separate legal entity from the business. Also, a business must register with the state, file as an LLC, and pay any necessary fees in order to be accepted.
How Do You Form an LLC in North Carolina?
First, you’ll want to ensure that your business name is available by checking the North Carolina Business Registry. In order to form an LLC in North Carolina, you must fill out the Articles of Organization. This includes:
- The business name, ending in an applicable LLC.
- Your name and address (as well as the name and address of any other members or organizers of the business, such as a partner).
- The registered office street address and mailing address.
- Your principal office address and mailing address.
Once this paperwork is filed, you may need to fill out additional paperwork and submit fees to obtain your employer identification number (EIN) if you plan on hiring employees. Having a business law attorney assist you with business formulation and planning as well as any other paperwork ensures there won’t be mistakes that can slow down the process or lead to complications in the future.
How Much Does It Cost to Form an LLC in North Carolina
The initial cost of registering your Articles of Organization is a $125 filing fee.
Advantages and Disadvantages of Limited Liability Corporations
With a better understanding of how a limited liability corporation works, let’s consider the benefits and drawbacks of choosing this structure.
Advantages of an LLC
The main advantage of operating as a limited liability corporation is that you have personal liability protection for business debts and injuries. For example, if you take out a business loan under your LLC’s name, and you default, the lender can only sue for business assets, keeping your personal assets safe from seizure.
Additional benefits include:
- Simple taxes. Much like a sole proprietorship, if you are a single member LLC, your business income and expenses can pass through to your personal income tax return. However, you also have the choice to file separately as an S corporation to reduce your self-employment taxes.
- Access to lending. Having an LLC lends more credibility to your business, making it easier to secure financing.
- Separation between personal and business finances.
Disadvantages of an LLC
Forming a limited liability company can be a complicated and lengthy process. There are several forms to fill out and fees that need to be paid before you can begin operating as a business. While North Carolina is much easier than other states to form your LLC, if you’re new to operating a business, we would recommend working with a business law attorney to ensure you’re making the right choice for your business and following procedures properly.
How to Choose the Right Business Structure
Typically, sole proprietorships are best for single business owners who are at no risk of financial or personal liability. For example, freelance writers, individuals operating certain types of online business, or similar roles can typically choose this structure without worry. If you plan on offering a product or service, hiring employees, or taking out funding, operating as a single member LLC may be in your best interest.
Schedule a Consultation with a Business Law Attorney in Raleigh Today
If you are planning on opening your own business, start off right by consulting with an experienced business law attorney at Kirk, Kirk, Howell, Cutler, & Thomas, LLP. We can discuss your options with you, help you set up your LLC or sole proprietorship depending on what’s best for you, and walk you through the next steps to ensure your business is legally set up for success.
To set up a consultation, call us at 919-615-2473 for our Raleigh office or 919-365-6000 to reach our Wendell office, or fill out the form below. We look forward to helping you with your legal needs!
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