When it comes to creating a business entity, many people start out with a sole proprietorship. This is essentially just one person working the business as themselves and is easy to file taxes on.
While this type of business entity may be perfect for someone who has a side hustle, there may come a time when the business grows to the point where a limited liability company makes more sense.
When the owner wants to protect their assets
One of the biggest differences between a sole-proprietorship and an LLC is the designation of liable parties in the event of a lawsuit. Forbes.com reports that under a sole proprietorship, owners have no protection against lawsuits and that their personal property is at stake.
An LLC, however, is a separate business entity and a lawsuit only affects assets that the business owns. This means that the LLC protects the owner’s personal assets, such as their house or vehicles, from lawsuits against their business.
When the business brings in more money
As a sole proprietor, the owner owes taxes on all the income that runs through the business. Once the business makes a significant amount of money, an LLC may be more appropriate to help alleviate some of the tax burdens, if it is set up correctly.
Under an LLC with more than one member, each member is only responsible for paying taxes on the income they personally receive from the business. According to the Internal Revenue Service website, the same is true for credits and deductions. Instead of owing taxes on all profits made during the year, members are only responsible for the portion they take in income.
Every business is unique and presents a different set of needs and challenges. For those who feel that their business may have outgrown a sole proprietorship, an LLC may be the right choice.