Sole Proprietorship vs. Unincorporated?

Question

I live in Texas and would like to know which would work best for me, a sole prop. or unincorporated (LLC) ? It's a small start-up business with minimal profits (service/event planning industry) annually. I have the legal descriptions of each business entity but am attempting to narrow down the one that is "most likely" better suited for a small business owner such as myself, with little/no profits, home-based, etc...

Answer 1

many times the driver in making that type of decision is tax related -

my suggestion is to speak with your accountant to see what makes the most sense for you and your type of business

Answer 2

The legal difference between a sole proprietorship and an LLC has to do with your personal liability for the entity.  If you have a sole proprietorship, then you are personally liable for all debts incurred in the business.  If you have an LLC, then the LLC can open separate bank accounts in its own name, and your personal liability for the LLC's debts is limited to the amount you put into the business.  This difference may not matter much if you are operating out of your home, have no employees, and are not engaged in a business where you're likely to be sued or to rack up big losses.

While LLC status has the advantage of limited personal liability, it also has disadvantages.  Specifically, you will have to act like a corporation, at least to the extent provided by Texas LLC law.  This means filing for a charter with the state, paying a fee to be incorporated as an LLC, holding corporate meetings, having a board, etc., etc.  It's not that difficult for a one-person LLC, but sometimes it's a hassle.

Notwithstanding the post above, there is not much difference from a tax perspective in choosing to be an LLC vs. a sole proprietorship.  Unless you elect to be treated as a corporation for federal tax purposes--and you wouldn't want to make that election because it would create two layers of tax instead of one--your LLC would be treated as a "tax nothing," that is, as if it wasn't a separate entity.  If the LLC earned income, you would report that income on your personal tax return.  The same would happen if you had a sole proprietorship.

Make your decision based on your prediction about whether the business is likely to grow.  If more people become involved (as employees or fellow owners), if you open facilities separate from your home, or if the business faces risks of lawsuits, then go for the LLC.  If not, stick with the sole proprietorship.

And remember, you're not committed to your decision forever.  You can always start out as a sole proprietorship and become an LLC later on.