If you work from home, whether it’s as a contractor, the owner of you’re a business or a self-employed freelancer, you have to make some decisions when it comes to your legal structure. The structure of your business is also important regarding tax liabilities, and the two top options utilized by most people who work from home are either a sole proprietorship or an LLC.
So how do you know which is right for you?
The following are some key considerations to keep in mind if you’re comparing these structures and trying to decide which is right for you.
Defining a Sole Proprietorship
A lot of people who work from home in different capacities opt to operate as a sole proprietorship because it’s basic and simple to set up. This means you’re an unincorporated business, and you yourself run your organization.
You don’t have to take any formal legal action to create a sole proprietorship, and you may already have one without knowing it if you’re self-employed.
While it is the easiest route, it’s not often the best for many people.
Defining an LLC
On the other hand, an LLC or a limited liability company is a structure that provides some flexibility as well as legal protection of your personal assets.
You do have to take certain steps to form an LLC including filing Articles of Incorporation, determine ownership of your business, applying with the IRS, and doing anything that’s required by your state and local government.
Personal Liability
One of the primary downfalls of a sole proprietorship versus an LLC is the level of personal liability you have when you’re a sole proprietor. There is really no distinction between your personal and business assets, and ultimately you are your business.
When there is no legal separation, it means that if your business acquires debts or obligations, either through legal issues or just operations, you are personally responsible for them. Since you’re taking complete control of your business, you’re ultimately responsible for every success but also every failure when you operate as a sole proprietor.
On the other hand, when you form an LLC you have some legal protection, and as the name implies, liability is limited regarding business debts and obligations. Also, if you need capital to fund your business, it may be easier to get if you’re an LLC. Most venture capitalists and investors will only put their money toward an LLC or corporation.
Taxes
Another big thing to think about when comparing these two commonly used structures is taxes. When you’re a sole proprietor, you file and pay taxes as an individual.
With LLCs, something called pass through treatment happens. That means profits are taxed on each member of the LLC’s personal return.
The biggest thing that differentiates an LLC from a sole proprietorship is the level of protection an LLC provides. If you don’t have a lot of business debts or obligations yet, this may not be a concern, but many professionals recommend starting as an LLC because it gives you room to grow as a business, and it separates you as an individual from your business.
