Single Member LLC vs Sole Proprietorship

Getting a small business off the ground is challenging to say the least. For most folks, owning your own business is a dream come true. But once you’ve decided that you’re going to start your own small business, even if you’re just freelancing, it may be a good idea to set yourself up “officially”, by registering your business. There are multiple structures to choose from, but for solo entrepreneurs, many will either choose to be a Sole Proprietorship (also known as a Doing Business As or a DBA) or they may choose to be a Single Member LLC.

A Sole Proprietorship is an unincorporated business owned by one person. Setting up a Sole Proprietorship is a fairly easy process and usually is one of the least expensive ways to establish yourself as an official business. Most States will have a form that you complete, such as a Certificate of Assumed Name or the document may be called something different. You fill out the form, pay the Filing Fee, submit your documents to your locality and once it is all complete, you can begin to carry on your affairs using your business name.

Like everything else, there are disadvantages too. One disadvantage is that the owner assumes unlimited “personal” liability for debts and lawsuits, therefore your personal assets such as your home, car, bank accounts, etc., could potentially be compromised if anyone ever sues you. One loophole to this potential threat is to make sure you set yourself up with Business Liability Insurance.

A Limited Liability Company (aka LLC) has become a popular form of business. Some solo entrepreneurs prefer to set themselves up as an LLC because it does give you some form of “liability” protection and can give you a sense of separation of business and personal assets. LLC’s, like Sole Proprietorships, are also unincorporated businesses. However, you do have the option to ask the IRS to “treat you like a Corporation” by completing a special form. When you are taxed as a Corporation, the money you pay yourself is classified as a Wage, and is therefore “tax deductible” to the business. Otherwise, like a Sole Proprietorship, any money you pay yourself or Net Profit that you’re left with, is classified as something called an Owner’s Draw and is not tax deductible to the business.

To form your LLC, you will need to file a document called Articles of Organization with your State or with whatever State you’d like to establish yourself in. That’s one thing that some people don’t realize….you are not obligated t set up your LLC in the state that you reside in or in the State where your business will be located. Some people decide to set up in other States due to lower filing fees, or for lower income taxes or no income taxes. If you choose that option, just make sure you do your research, because you may still be required to register in your State as a “foreign” LLC, so that you can conduct business in that State.

In Summary, with either option, you will be filing “one” tax return, which is your annual 1040 form with the IRS, and your business financials will be reported on a form called Schedule C, which is the Profit and Loss Statement for Business. (Note – if you do choose to register as an LLC and then opt with the IRS to be “taxed” like a Corporation, then in that case, your business will actually be filing a separate business tax return and your business will need to issue you a W-2, which you will then use to prepare your personal 1040.

In either case, I always highly recommend to people to be sure an obtain a Federal Tax ID number, also known as an EIN. Some business consultants will say that it’s only necessary to get a number if you’re planning to hire people to work for you, but I disagree. I feel that obtaining an EIN for your business is another step towards letting the IRS know that you are taking your business serious and that you’re treating your business like a real business. Having an EIN also prevents you from having to disclose your personal social security number during times when you may need to provide your info after doing some work as an Independent Contractor for someone or for another business.

In both cases, there may be other business compliance issues in terms of Sales Tax matters, Payroll Tax matters, or certain licensing and permits that may be needed. Just make sure you do your research.

I hope that I helped you to better understand the differences in a Sole Proprietorship versus a Single Member LLC. But whatever you decide, don’t let the overwhelm of information and options stifle you to the point where you don’t take any action. And if you need help, feel free to get in touch with me. I work with new and early-state entrepreneurs all over the U.S., as well as existing businesses owners who are looking to improve their business in one aspect or other.


Ktasha Hardge Administrator
Self Employment Tax Strategist , Hardge Connections LLC | Smart Tax Tips 4Biz
Hi, my name is Ktasha Nicole Hardge (Tasha). I am a Self Employment Tax Strategist & Business Coach to Solo-Entrepreneurs. Beyond tax-saving services, I teach men and women entrepreneurs how to turn their start-up and growth ideas into reality and help them implement actions steps correctly so they can increase their chances of overall business success!
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