Today’s topic is one that I get asked about frequently by fellow creatives. Let’s talk sole proprietorship vs. limited liability company. When should you remain a sole proprietor? When should you take the plunge and register your business as a limited liability company?
Most creatives, whether a blogger, photographer, graphic designer, or artist, start out providing services and products on a small-scale. Unless you’re really on the ball, you usually operate under either your name or a name you’ve created for your brand and/or business. Eventually there comes a time when most creative entrepreneurs feel like they need to register their business as a legal entity.
Let’s iron out the difference between a sole proprietorship and a limited liability company.
Sole Proprietorship vs. Limited Liability Company
A major pro for registering your company as a limited liability company (LLC) is that once you register your business as a LLC, it will be a completely separate entity. You and your business are two separate things. Meaning, if you run your business as a sole proprietorship, you will be personally liable for any claims against your business. You have unlimited personal liability for all debts and legal liabilities incurred by your business. Your personal assets such as your home and/or personal bank accounts could be at risk to satisfy any claims against your business (debts or legal action). On the other hand, when you register your business as a LLC, the LLC is a separate entity. It stands all on its own. Therefore, only the business assets will be at risk to satisfy any claims against your business.
You’ll want to keep in mind that registering your business as a LLC requires filing paperwork in the state that you’d like to register. Most states require a filing fee. Each state’s fees differ. I’ll use D.C. as an example. The filing fee in D.C. is $220. And some states require additional fees for filing additional paperwork and upkeep. Again, as an example, D.C. charges a report-filing fee of $300 the year after you register and then every two years thereafter. So, yes, it’s a bit of an investment.
One factor that ends up being a wash is the tax implications. I have to preface this by saying I am in no way an accountant or a tax attorney. But I do know that so long as you’re operating your business as a single member LLC, your business will be taxed at the same rate as if you were operating as a sole proprietor.
While it’s perfectly fine to run your business as a sole proprietor, I almost always recommend registering your business as a LLC. Not only because of the legal benefits and protections, but it also gives your business an added element of legitimacy.
If you have any questions about sole proprietorships or limited liability companies, feel free to email me at email@example.com!