3 reasons entrepreneurs form LLCs instead of sole proprietorships

3 reasons entrepreneurs form LLCs instead of sole proprietorships

On Behalf of | Feb 26, 2023 | Business & Corporate Law |

There are many different ways of forming a business, and some of them are more complicated than others. A sole proprietorship is the simplest business structure for someone starting a new company, but there are trade-offs to the simplicity of this structure.

Especially when people have big ambitions for the company they want to start, investing in a more complex business entity from the earliest stages of organizational development can be a smart decision. Many people choose to start a limited liability company (LLC) instead of a sole proprietorship if they want to run a small business on their own. These are just some of the reasons that people choose LLCs as their entity’s structure rather than a sole proprietorship.

1. They want to protect their assets or future income

Starting a business does involve some degree of personal financial risk. Frequently, the owner or executive at a business could end up financially responsible for the business’s debts.

They could also face financial consequences from lawsuits related to defective goods or substandard services provided by the business. Establishing an LLC helps protect the person starting and running the company from direct liability related to the company.

2. They want to reduce taxes

Businesses and individuals qualify for different tax exemptions and write-offs. Starting an LLC can give an entrepreneur access to the best of both worlds. There are pass-through options for business revenue that allow someone to first make business deductions and then claim that income as an individual.

3. They want their company to look like a trustworthy organization

There is something to be said for the simplicity and honesty of a professional like a plumber doing business under their own name. However, many people would rather trust a plumbing company with a catchy name that seems larger and more established than an individual that they don’t personally know. Creating a formal business structure creates a layer of professionalism that can help set one organization apart from its competitors.

Establishing an LLC requires special paperwork and additional tax preparation and reporting efforts annually. However, many entrepreneurs find that such investments are worthwhile given the benefits that this legal structure affords. Learning more about different business structures can help those aspiring to start their own small business. Seeking legal guidance to finalize one’s choice is also a valuable investment of one’s time.