When choosing your corporate structure, you should be aware that some industries do a lot better with a certain type of corporate structure than others. Even though the below might sound great, your specific company might actually do a lot better with a different option. That is why it is important to talk to a competent California Business Lawyer (LINK). With the disclaimers out of the way, here are some key differences between Sole Proprieterships and LLC.
The Basics
As you may or may not know, a sole proprietorship is a corporate entity that is basically an extension of you. You are literally claiming a DBA. You, as an individual are doing professional work under this name. A LLC (limited liability company) is a proper company with one or more owners, which attempt to shield the owners from liability.
- How Liability Is Handled
When you are a sole proprietor, you may face a lot less registration fees, however, you are essentially just doing business as yourself. It allows you to legally do business as a certain name, however, you are 100% LINKED with that business name. There is no difference between you and the business. The business is YOU. So if there are any contracts signed, legal rules broken, debts incurred, or implicit liability done in the course of business, you personally are responsible. In many common law states, that means your spouse is also linked.
If you go the LLC route, you are essentially creating a legal entity separate from yourself. You may own or be a managing member of that legal entity, and be at risk of having the corporate veil pierced to be personally liable, but in general, your assets are separate from the assets of the LLC. Keep in mind, most financing and bonds may require a personal guarantee (PG) from someone. Obviously if you are the captain of the ship, no one else except you or your partner will be willing to give that personal guarantee, so don’t think that your assets cannot be seized just because you have an LLC.
However, in a situation where there was no PG, such as a consumer or business suing you because of a defective product or service, with an LLC, you can claim you are not a party to the dispute. The LLC is. In those cases, your assets would likely be off the table. (If you acted fraudulently or in bad faith, usually corporate veils can be pierced.)
- How Control is Handled
In a sole proprietorship, there is no one who can compel you to do something. Decisions are yours and yours alone. In an LLC, this can be the case if there is one owner, however, if another person is given equity or it starts with/takes on a partner, then the LLC is jointly owned. You must make important decisions with the agreement of the other partner. The best Orange County Business Lawyers !!!LINK!!! can help draft the operating rules of the LLC, to help handle conflicts. A formalized set of processes or rules that dictate how disagreements are handled that are agreed to in the beginning may sound restrictive, however, they can help save all the partners from contention, and costly litigation.
- How Financing is Handled
There isn’t too much difference in getting financing between Sole Proprietorships and LLCs in most cases. Lenders are almost always going to look at your credit score (or a business’s credit score), and due diligence. The due diligence will almost certainly look at your time in business, and your past statements. How much money came in, how much money left, and what for. If you have a great looking statement history, with plenty of money coming in and being used responsibly, for a long time, you are much more likely to get financing. Just having an LLC alone won’t help you get financing if you’ve just started up, have no statements, or poor statement history showing lack of sales and high expenses.
The one positive to having an LLC is that in some financing arrangements, equity in the venture might come up. A sole proprietorship cannot offer equity, whereas an LLC can.
- Who can have ownership status
In a sole proprietorship, I think you can guess by now that only you can be an owner. It cannot be sold, given, or transferred. However, an LLC has no actual limit on the amount or types of owners. Other individuals can be owners, other corporations can be owners (including foreign companies), trusts and non-profits can even be owners.
If your business does not need large amounts of capital, a sole proprietorship is still a possibility. However, if you are needing large investments, with a lot of different players owning equity, you will almost never find them operating under a sole proprietorship.
- Charter differences for how long it exists
The assets you own as a sole proprietorship stay yours when you close your business. If you die, the property is handled as individual property. The business ceases to exist, because you are the business. However, in an LLC, if there are multiple owners, your ownership in the LLC can be transferred to your family. Should the surviving owners wish, the company can continue to do business indefinitely.