Whether you are planning a new venture or have already been in business for a while, there will come a time when you need to make a choice between a Florida LLC vs sole proprietorship.
Many small businesses in Florida start out as sole proprietorships. Some prefer to stay that way, but others find that transitioning to an LLC is better suited to their evolving needs.
So, should you set your business up as a sole proprietorship or an LLC? Read on to find out.
Florida LLC vs Sole Proprietorship: Should You Become a Single-Member LLC or Sole Proprietor?
A sole proprietorship, also known as a sole trader, is an unincorporated business with a single owner. These are often small or part-time businesses with no employees.
A limited liability company (LLC) is an incorporated business. Think of it as a hybrid between a corporation and a partnership.
Both business structures have their benefits and disadvantages. Which one would work best for you depends on many factors, including the nature and size of your business, your financial goals, and more.
In the rest of this article, we explore the differences between a sole proprietorship vs an LLC in Florida and their respective pros and cons.
What Is the Difference Between a Sole Proprietorship and an LLC?
The main difference between an LLC and a sole proprietorship is liability protection.
An LLC is a separate legal entity from its owner(s). This means that you are not personally responsible for all business debts and liabilities. In the event of a lawsuit, your personal assets will be safe.
In contrast, as a sole proprietor, you will be treated as a single, self-employed individual for all tax and legal purposes. In the eyes of the law, you and your business are one, which makes you liable for the debts and liabilities of the business and puts your personal assets on the line.
There are other important differences between sole proprietorships and LLCs, including different tax treatments, privacy protections, and administrative requirements. The sections below explore these in more depth.
Sole Proprietorship vs LLC: Taxes
There is a big difference between LLC and sole proprietorship tax regimes. Generally, LLCs provide greater tax savings and more flexibility.
Here are the most important things you should know about the tax benefits of LLC vs sole proprietorship:
Tax Savings
Sole proprietors are taxed as self-employed persons. Anything you earn through the business is considered personal income, and you must report it as such to the IRS on your personal tax return.
The problem with this arrangement is that you could end up paying more in taxes than if the business was registered as an LLC. This is one of the biggest tax benefits of an LLC vs a sole proprietorship.
LLCs are subject to pass-through taxation. The business itself does not pay taxes. Instead, they are “passed through” to the owners (also known as members), who report all profits and losses on their individual tax returns. This often results in significant tax savings.
Tax Flexibility
Another key aspect of LLC vs sole proprietorship tax advantages is flexibility.
LLCs can choose how to be treated for tax purposes. You may elect to be taxed as:
Partnership
Sole proprietor
S corporation (S corp)
C corporation (C corp)
All can result in savings depending on your circumstances. For instance, if you and other members of the LLC earn a large personal income, it is often more beneficial to be taxed as a corporation. In other cases, it may be better to be taxed as a partnership, which is a handy way to combine the tax benefits of a partnership with the liability protection of a corporation.
To ensure that you elect the right tax status for your needs, it is important to learn about the differences between a Florida S corp vs LLC and a Florida C corp vs LLC.
Note also that if you do not make an election, you will be automatically taxed as a partnership or sole proprietor, depending on how many members your LLC has.
Difference Between Sole Proprietor and LLC for Privacy
Another of the advantages of LLC over sole proprietorship status is heightened privacy protection. You can form an LLC anonymously and operate under your business name while keeping your personal identity private.
LLC and Sole Proprietorship Differences: Costs and Admin
For all their benefits, LLCs can be a pain to incorporate and manage. To form an LLC, you have to:
Pick a unique legal name and register it with the Florida Division of Corporations.
Name a registered agent, which is a business or an individual with a physical address and authorized to do business in the state, that will accept legal documents on behalf of the LLC in the event of a lawsuit.
File the LLC’s articles of organization with the Florida Division of Corporations.
Draft a Florida LLC operating agreement. This step is not mandatory but is highly recommended for single-owner LLCs, as it helps set them apart from sole proprietorships.
Apply for an Employer Identification Number (EIN) for multi-member LLCs. Single-member LLCs need one as well if they elect to be taxed as a corporation.
Obtain state and business licenses. These are required for some industries.
File an annual report with the Florida Division of Corporations between January 1 and May 1 every year.
All that paperwork comes with associated costs. These can be steep for a fledgling business, but the tax advantages of LLC status can help offset that.
Setting up and running a sole proprietorship is a lot easier. All you need to do is obtain the required industry licenses, if any, set up shop, and start generating income. You are not required to submit annual state filings, either.
Sole Proprietorship Florida vs LLC: Funding and Public Image
An LLC helps you look more professional to clients and investors, making it easier to raise capital and grow the business. You can add new partners or sell a percentage interest, neither of which is possible with sole proprietorships. Sole traders often find it harder to get approved for business loans as well.
LLC or Sole Proprietorship for Small Business Ventures?
If you run a small, one-person business, you may be better off as a sole proprietor. The start-up costs and red tape are minimal. You do not even need an EIN and a business bank account; you can just use your SSN instead. You will be the sole decision-maker and are free to use the profits as you see fit. You can also dissolve or sell the business at any time and with minimal hassle if you find a better-paying job.
Sole Proprietorship vs LLC for Online Business Owners
If you have or are looking to start an online business, consider forming an LLC. Online businesses are often easier to scale. An LLC status will provide you with important liability protection and tax advantages as you grow.
Recap on the Pros and Cons of LLC vs Sole Proprietorship
Here is a quick summary of the pros and cons of sole proprietorship vs LLC status:
Pros and Cons of LLC in Florida
What Is the Benefit of LLC over Sole Proprietorship?
Liability protection
Greater tax flexibility
Potential tax savings
Greater privacy
Looks more professional
Easier to get funding
Disadvantages of an LLC vs Sole Proprietorship in Florida
Higher start-up costs
More paperwork
Increased complexity
Pros and Cons of Sole Proprietorship in Florida
What Are the Advantages of Sole Proprietorship over Limited Companies?
Low start-up costs
Quick and easy set-up
Minimal red tape
Full control over decision-making
Easier to dissolve or sell
Disadvantage of a Sole Proprietorship vs an LLC
No liability protection
Limited potential for tax savings
Can look less “serious”
Need Help Navigating the Differences Between Single-Member LLC vs Sole Proprietorship Florida Law?
You have come to the right place. Contact the Cueto Law Group today to find out which business status would work best for your needs.
Final Thoughts: Which Is Better, LLC or Sole Proprietorship?
So, is it better to be a sole proprietor or LLC?
There is no one-size-fits-all answer. Both business structures have their pros and cons, and which one would work best for you depends on your unique circumstances.
It’s not just a matter of choosing between an LLC and a sole proprietorship, either. There are different types of LLCs, such as member managed vs manager managed LLCs for example. This is why it is important to speak with an experienced business lawyer who can help you elect the most appropriate business entity.
Limited Liability Company vs Sole Proprietorship FAQs
Here are the answers to some common questions on Florida LLC vs sole proprietorship law:
Is an LLC Considered a Sole Proprietorship?
A limited liability company is a corporation and cannot be a sole proprietorship, even if it is a single-member LLC with just one owner. However, an LLC can elect to be treated as a sole proprietorship for tax purposes, which can result in tax savings.
Can You Be a Sole Proprietor and an LLC?
No, you cannot. A sole proprietorship is an unincorporated business run by an individual. For all tax and legal purposes, there is no difference between the business and its owner. An LLC is an incorporated business, which is a separate legal entity from its owners.
Can an LLC File Taxes as a Sole Proprietor?
An LLC can elect to be taxed as a partnership, a sole proprietorship, an S corporation, or a C corporation. If you do not make an election, you will be automatically taxed as either a partnership or a sole proprietor, depending on the number of owners.
Do LLCs Pay More Taxes Than Sole Proprietorship?
Unlike sole proprietorships, LLCs are subject to pass-through taxation. This means that the company itself does not pay taxes. Instead, they are passed on to the owners, who report all profits and losses on their personal tax returns. This can help realize significant tax savings.
Can You Switch from LLC to Sole Proprietor?
You can change an LLC to a sole proprietorship by dissolving the corporation and starting a new business as a sole proprietor. Among other things, you need to file articles of dissolution, pay off all your creditors and taxes, and publish a notice of dissolution if required by state law.
