Is my LLC a sole proprietorship or corporation [Expert Guide]

Last updated : Aug 24, 2022

Is an LLC a type of sole proprietorship?

A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

What is the difference between LLC corporation and sole proprietor?

An LLC exists separately from its owners—known as members. However, members are not personally responsible for business debts and liabilities. Instead, the LLC is responsible. A sole proprietorship is an unincorporated business owned and run by one person.

Should I classify my LLC as a corporation?

The best tax classification for an LLC depends on whether you want your business profits to be taxed at your personal income tax rate, or at the corporate tax rate. If you'd prefer personal tax rates, you can classify it as a disregarded entity or as a partnership. Otherwise, you can classify it as a corporation.

How can you tell the difference between an LLC and a corporation?

The main difference between an LLC and a corporation is that an llc is owned by one or more individuals, and a corporation is owned by its shareholders. No matter which entity you choose, both entities offer big benefits to your business. Incorporating a business allows you to establish credibility and professionalism.

What type of entity is an LLC?

A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner's tax return (a disregarded entity).

Is a single-member LLC the same as a sole proprietor?

According to the IRS, a single-member limited liability company is a "disregarded entity", meaning there is no separation between the business and its owner. By default, the IRS taxes it the same as a sole proprietorship. However, you do have the option to be taxed differently.

What is the biggest difference between a sole proprietorship and an LLC?

Perhaps the biggest difference between a sole proprietorship and an LLC is the issue of limited liability protection. Sole proprietors have unlimited liability for business debts, lawsuits and other business-related obligations.

Is an LLC an S Corp?

An LLC is a type of business entity, while an S corporation is a tax classification. An S corporation election lets the Internal Revenue Service (IRS) know that your business should be taxed as a partnership.

Can a sole proprietor be a corporation?

No, by its very nature, a sole proprietorship is a business owned and operated by a single person, so a corporation cannot own a sole proprietorship. However, if you own a sole proprietorship, you do have the option of converting your business to a corporation, which provides several benefits.

What are the 3 types of LLC?

• Single-member LLC for the sole-proprietorship (solo entrepreneur)
• Multi-member LLC (member-managed LLC or manager-member LLC)
• Domestic LLC and Foreign LLC.
• Series LLC.
• L3C Company (low-profit LLC)
• Anonymous LLC.
• Restricted LLC.
• PLLC and LLC.

Why would an LLC file as an S Corp?

The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. An LLC taxed as S corp offers benefits of a corporation while also providing flexibility on income treatment.

Should I elect S corp status for my LLC?

Although being taxed like an S corporation is probably chosen the least often by small business owners, it is an option. For some LLCs and their owners, this can actually provide a tax savings, particularly if the LLC operates an active trade or business and the payroll taxes on the owner or owners is high.

How do I know if my LLC is an S-Corp or C Corp?

You'll find your corporation classification on your business returns. You can review previously filed tax returns or ask your accountant to review the returns. All corporations must file an annual income tax return. C corporations file IRS Form 1120 and S corporations file Form 1120S.

Which is better for taxes LLC or S-Corp?

LLCs. As an LLC owner, you'll incur steep self employment taxes on all net earnings from your business, whereas an S corporation classification would allow you to only pay those taxes on the salary you take from your company. However, itemized deductions could make an LLC a more lucrative choice for tax purposes.

Can you switch from LLC to corporation?

Most states allow LLCs to be converted to a corporation by the simple filing of documents with the state. At the time of the conversion the LLC by operation of law becomes a corporation and, therefore, the owner of all the assets, liabilities and obligations of the LLC.

What is the owner of an LLC called?

If you own all or part of an LLC, you are known as a “member.” LLCs can have one member or many members. In some LLCs, the business is operated, or “managed” by its members. In other LLCs, there are at least some members who are not actively involved in running the business.

What type of entity should my business be?

If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well. A corporation is constructed to have a board of directors that makes the major decisions that guide the company.

How does an LLC avoid paying taxes?

A general Corporation making a Subchapter “S” Election or an LLC with or without a Subchapter S Election pays no federal tax on its taxable income and no employment taxes on its distributions to stockholders.

Do I need an EIN as a sole proprietor?

A sole proprietor without employees and who doesn't file any excise or pension plan tax returns doesn't need an EIN (but can get one). In this instance, the sole proprietor uses his or her social security number (instead of an EIN) as the taxpayer identification number.

What tax classification is a single member LLC?

For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.

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hey this is attorney elizabeth weinstein and today we're going to talk about whether your one owner business should be an llc or a sole proprietorship looking at llc's versus sole proprietorships for one owner businesses here in the united states one issue to consider is that if you just start a business as one person you're automatically a sole proprietorship but you have the option to consider forming a limited liability company or an llc there are many videos and articles online that say everybody should be an llc but that's not the truth for many very tiny businesses one owner businesses starting out as a sole proprietorship is the most appropriate way to begin but not in every situation so what are the plus and minuses of the default a sole proprietorship well first it's the default so you don't have to do anything you don't have to pay fees to anybody you don't have to hire attorney you have to file forms with some government you just exist automatically as a sole proprietorship the other advantage is that you can have the same tax status as an llc anyway so if having the tax status as a pass-through entity where it's you just declare your taxes to the irs on your schedule c if that's what you're planning to do anyway if that's what is the most appropriate thing for you it doesn't actually matter from a tax perspective if you're doing an llc or sole proprietorship now for a sole proprietorship you actually still may need to file some forms you may need a business license or other permits you may need to file a dba a doing business as registration or trade name registration with your state or your county or some other agency the big downside of a sole proprietorship is that you as a human person are personally liable financially for whatever happens in the business so what does that mean that means that if your business goes bankrupt if it owes a bunch of debts to people if it gets sued because someone doesn't like what you did you're personally liable for that so they can come after your personal assets now if you have no personal assets maybe you don't care but if you have a house if you have money that you received in the inheritance if your spouse has money all those things can be attachable to some kind of a lawsuit or debt collection sometimes they can also even go back go after your future earnings so you get a big debt settlement against you then you're gonna have to keep paying that even after the business is gone so forming an llc or limited liability company is something that any one or more business in the united states can do you can do it in every single state all 50 states in the united states now unlike a sole proprietorship it costs money to form an llc if you do it yourself and you file directly on for the llc on the website or filling out whatever forms and filing by mail with your state then the fees are lower than if you use a filing service or if you hire an attorney to do it for you but you still have to pay the state's fees it could be 75 it could be hundreds of dollars but you're gonna have some amount of money you also may need to do publishing requirements in some states which can be hundreds and hundreds of dollars there are a lot of fees you may not have thought about you also may have something some annual fees in some particular states it could be annual filing requirements that are like a 800 fee i guess in california it could be 300 it could just be 125 but there's probably going to be some kind of annual obligation for filing and updating them on the state on your name and address and changes and things of that nature and also just paying them more money another issue with an llc is you have to honor the corporate formalities for it to be a legit llc that means it needs a separate bank account it needs a separate paypal if you use paypal it needs to have its own bookkeeping system which doesn't need to be something you don't have to use quickbooks you could just use a spreadsheet but it's got to be some kind of system you can't just use the llc's money and the llc's assets as your own personal slush fund i've seen this be a huge issue for clients of mine where they didn't realize that they couldn't just take money that's the llc's money they couldn't just use the llc's credit card or debit card to buy groceries you may think that's okay because there's only one owner it's not like you're stealing money from the other owners but how you actually have to do it is you first have to pay yourself a distribution or salary which depends upon this your tax situation what's appropriate and then the money's in your own personal bank account and you use it for your own personal things you can't co-mingle so of course the big advantage of having an llc is that it limits your liability it's called a limited liability company that's what it does so what that means is that your llc it's like its own little entity its own little person over here and it can sign contracts it can take on debt it's liable for whatever the business does now you have to honor all those corporate formalities for that to work when you sign a contract it can't be in your own personal name it has to be in the name of the llc for example and if you have to cosign a lease or something like that to guarantee it then you're still personally liable for that business the other advantage of forming an llc is that you have an option on how you're going to be taxed in the united states an llc can be taxed just like a sole proprietorship where it's just passed through on your schedule c or you can elect to have it be taxed like a corporation now there are some requirements where certain people in certain entities certain owners cannot have an s corporation tax status but there can be advantages where you've been at paying less taxes for s corporation or a c corporation and because you have more deductions and more of the benefits that you pay yourself and your employees are tax-deductible so what's the bottom line should you as a one-owner business be a sole proprietorship or an llc so here's the thing if you're starting out as a brand new business you don't really have any personal assets the business isn't making any money yet you're the only owner which we already talked about and you don't have any employees also the kind of business you're doing is the kind of business that has a ton of risk of getting sued because you're very picky on the clients you take you have all your clients sign contracts you have adequate insurance to cover you you don't do in person live events where someone could you know break their leg or something like that then stay a sole proprietorship for the time being may make a lot of sense but if you have a lot of personal assets you own house you have investments et cetera your spouse is earning a lot of money if you have employees so if you have any employees that introduces a lot of liability both for the employees not being happy and coming after your business and also for them doing some bizarre thing where you end up getting sued and the last issue is if you have a business that just has an inherent amount of ris

Thanks for your comment Marcelina Minnaert, have a nice day.
- Lasandra Medlock, Staff Member

a friend graham cochran here one of the biggest questions I get as a business coach is really simple should I run my business as an LLC or as a sole proprietor maybe you've asked yourself that question if you're trying to figure out which entity makes sense to you from a tax perspective or maybe you're just thinking I don't know what the heck either one of those are or why I should care I'm just making money or trying to make money believe me I've been there and what I hope to do in today's video is explain what each one of those are and the differences and give you a simple and easy framework to understand which one is the right fit for you and your business - huge preface is before we begin number one is I am NOT a licensed tax professional I can only give general advice to you based off of my experience and what makes sense as a business coach I don't know your specific details so it might make sense to consult your CPA or your tax advisor if you have more detailed questions and second all of this content makes sense for you if you run your business in America this is the country I live in and work in and it's the tax code I understand so I'm gonna be speaking specifically to the American tax code make sense all right let's jump in sole proprietor LLC what the heck are these things in the plainest terms possible a sole proprietor is what you are by default when you start rendering a service or selling a product whether you know it or not the moment you open up shop as it were and start making money you are at least in the IRS --is eyes a sole proprietor there are no forms to fill out to become a sole proprietor there are no hoops to jump through it is just who you are by default and that phrase sole proprietor means simply this you are a one-person business or a one owner business sole meaning only and proprietor meaning or property owner easy-peasy so what does this mean for tax purposes by law if you make any money on the side with your side hustle you know I hate that word you must report that income on your tax regen if you want to be legal at least and you should because it's the right thing to do the many people run small side businesses whether it's cutting grass cutting hair designing websites whatever and they think they don't need to report that income if it's under a certain amount now if you make any money report that income on your personal tax return now the way the IRS views this income as side income is really simple they tax that income which is really your income minus your expenses so they attacks your profit like any income you make at your personal tax level so your personal tax bracket the same amount your tax on any paycheck you currently have so your tax at your same personal tax bracket plus something called self-employment tax which is at this moment 15.3% and this includes your FICA the Social Security Medicare all that kind of stuff so your personal tax bracket whatever that percentage is for you on the federal level and your extra fifteen point three percent self-employment tax now if you live in a state that charges state income tax you'll have to pay that as well not all states do but some do so you'll want to take a look at what that tax is for your state then we'll talk about how to file your taxes as a sole proprietor in a minute but in essence that is what you are by default you're making side income whether it's $10 or $10,000 you need to report it and there's a place for you to do it and that is how you're taxed on it now an LLC stands for limited liability company and it's exactly what it says it is a company that you form that has limited liability for the owner basically you're setting up a separate entity that runs the business that does the business that isn't you you own that entity and you might work in that entity but you are not it it is separate from you which comes in when things like lawsuits come about it keeps a separation a veil or a wall between what can be sued and what can happen over here and your personal life and your personal wealth and your personal assets and things like that now the big difference between the sole proprietor in the LLC besides having that separation the big difference as it relates to you and your taxes is that an LLC has to file its own tax return because it is its own entity separate from you so has to file its own return and then the profits which is all the income that business made - its expenses those profits are then passed through it's a pass-through entity passed through to you and you actually pay your taxes on those profits on your personal tax return at your personal tax rate so what's the difference between that and how your tax on a sole proprietor they sound almost the same at the end of the day let me explain the difference and which one is a better fit for you so should you run your business as a sole proprietor or should you form an LLC which one is the best one here is the back-of-the-envelope answer and then I'll unpack it easiest way to start on your business is as a sole proprietor and I would say forget even thinking about forming an LLC until you are making at least $50,000 or more in annual revenue here's why when you're just starting out as a business you're usually making little to no revenue right we'll have to start somewhere so the potential tax benefits of running your business through an LLC more on those in a moment don't outweigh the costs incurred by having an LLC things like having to file a separate tax return possibly paying a CPA or an accountant to handle all of that and do your bookkeeping as a sole proprietor you can do everything that an LLC can do you can set up a separate checking account for your business which you should be doing from day one by the way and you can do this at any bank of your choice you can set up a DBA or a doing business as where you can set up your bank account or accept checks or accept payment under your business name and not your personal name even though you're still a sole proprietor in the state of Florida this is called the fictitious name and it's the exact same thing and then filing your taxes at the end of the year is a breeze simply use something like turbotax.com or H&R block or whatever software you like and most of them are online these days to fill out your normal 1040 and follow the prompts when they ask if you've made any extra or side income or if you have a business answer the questions about your revenue how much you made your expenses how much you spent and it will calculate everything for you how much you actually are taxed on and what that tax should be based off of how much your overall income level is and all of the deductions therein all you have to do is keep good records of your income and your expenses including probably receipts at least take a picture of them save them the Dropbox or Evernote or wherever you like that way in case you get an audit it's really easy to show what your expenses were that they were valid expenses so the question is when does it make sense to form an LLC well I personally started my first business the recording revolution as

Thanks kreikia5 your participation is very much appreciated
- Lasandra Medlock

About the author

Lasandra Medlock

I've studied modal logic at State University of New York at Oswego in Oswego and I am an expert in industrial policy. I usually feel impressed. My previous job was cartographer (map scientist) I held this position for 12 years, I love talking about board/tabletop games and cookouts. Huge fan of Piers Morgan I practice mountaineering and collect swarovski figurines.