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From what I read there are two basic types of business recommended for a single person business (in the US):

  1. Sole Proprietorship
  2. LLC

My wife is looking to start a business for blogging/selling things/online consulting (a varietal hodge-podge of things). I gather that the sole proprietorship is the "easier" of the two in terms of costs/paperwork/etc so I'm inclined to go the easier route if the difference to her business is transparent. Is a sole proprietorship the way to go with this? I'm trying to figure out which one is more amenable based upon factors such as:

  • Tax advantages of one over the other
  • Writing off certain losses/capital equipment purchases/etc
  • Eligible for certain grants/loans
  • Ability to write off start-up costs
  • Yearly fees
  • Financial separation and legal protection?

I'm basically trying to think of everything I can since we only get one shot at starting this thing, so if there are any other factors I should consider when making this decision feel free to comment and I'll add them.

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5 Answers

up vote 9 down vote accepted

LLCs will give you a legal 'shield' that a sole-proprietorship will not but all other costs will generally be lower with a sole proprietorship.

I can't say about grants but bank loans should be the same both ways in that for a startup the bank will want you to personally guarantee the loan anyway.

Writing off startup costs should be the same both ways, at least they have been for me.

In general, for this kind of business, I would recommend starting as a sole-proprietorship and if things really start to get big then incorporate later. I did this for a consulting company and after three years I converted the firm into an LLC and that was quite easy to do. More paperwork under and LLC and certainly not worth it when you're just starting out.

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This answers a question I was about to ask, about converting from SP to an LLC. Although what state was it "quite easy" to convert in? Is that likely to hold for most states (or VA)? – John C Sep 20 '11 at 15:24
I don't think the state matters. when you create the LLC, you (since the SP is YOU) can give the assets or it can buy them from you or treat it as an investment-in-kind, whatever. You're not really converting, you're just starting an LLC with the same (or similar) name and moving your business activities (along with employees, etc.) over to it. – John Sep 21 '11 at 8:30
-1. LLC taxed as S-Corp can reduce SE taxes liability, you cannot do that with a SP or LLC as disregarded entity – littleadv May 30 '12 at 20:58
up vote 5 down vote

There's an excellent short book from Nolo Press titles "LLC or Corporation?". It compares a Sole Prop with LLC and corporation. It was written specifically to help small business owners think through these types of issues. You should be able to pick it from your local library if you don't want to buy the book.

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My library does have it! Headed there ASAP. Thanks for the lead. – Joel B Sep 9 '11 at 18:41
up vote 3 down vote

Watch out for surprise taxes and fees. For example, here in California, an LLC is subject to a minimum tax of $800. And if your gross receipts exceed $250K then they have what they call LLC fees that start at $900 whether you make a profit or not.

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up vote 2 down vote

If your LLC only has a single member (owner) then it is treated as a disregarded entity by the IRS and you don't have to file separate federal tax returns for it.

The value of the liability shield must be evaluated in regard to your personal assets. If they are substantial, then I would recommend going the LLC route.

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up vote 2 down vote

A single-member LLC and sole proprietorship are the same thing from the federal tax perspective. All taxes will be calculated and treated the same and all deductions you can take as a sole proprietor will be allowable to you as a single-member LLC.

In general from federal tax viewpoint, there are such business structures: (a) Sole proprietor = Single-member LLC (unless you treat your LLC as a Corporation for tax purposes), (b) Partnership (two or more people - may be in the form of an LLC or partnership), or (c) Corporation (may be in the form of a single person or two or more entities).

So, as the only person in the business, you can either be a sole proprietor (whether or not you choose to create an LLP) or a corporation. There are differences in taxation in choosing one or the other.

LLP in general could provide more legal protection (if you create and operate it correctly, like separate business bank account, credit card) in case somebody sues you, for example. However, some states may levy hefty fees for organization and annual or bi-annual fees.

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-1: "A single-member LLC and sole proprietorship are the same thing from the federal tax perspective" - incorrect statement. With LLC you can chose taxation as a corporation (without incorporating), with sole proprietorship you cannot. LLC and LLP are not the same things. – littleadv May 30 '12 at 20:56
@littleadv, you really try to downvote all my answers? I think in doing so, you are missing some true information which DOES exist in my answer: "(a) Sole proprietor = Single-member LLC (unless you treat your LLC as a Corporation for tax purposes)". Too bad some people get so occupied with hate. – Vasiliy May 31 '12 at 1:00

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