Sole Proprietorship or Single Member LLC?

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When you are a one person business, i.e. you are to be the only owner of your business, the question invariably arises:  sole proprietorship or single member LLC?

You are a sole proprietorship, as soon as you begin doing business.  There is no filing, no certificate, not even an EIN is required (unless you have employees).  Startup costs couldn’t be any lower.

A Limited Liability Company is a separate entity and requires certain filings and, if your LLC’s county of formation is in New York City, Manhattan, it will cost you at least $1430 to form.  A limited liability offers LIMITED LIABILITY and you are not in danger of being liable for business debts with your personal assets.   But $1430 is a lot of money to come up with and some people might just be fine with a sole proprietorship after having fully understood its limitations and risks.

  • The tax situation for a sole proprietorship and LLC is essentially the same.
  • Yes, not forming an entity with limited liability subjects you to potentially unlimited liability.  However, if you are a professional service provider or consultant and what you are selling is basically your service, you would always be liable for your actions anyway.  In other words, if you screw up, people can still sue you personally, even if you have an LLC.
  • If you are a startup LLC, anybody with a brain will also ask for your personal signature and guaranty when you enter into any kind of bigger contractual obligation, like signing a lease.  So the limited liabilty won’t save you from being personally liable.
  • You can hire employees as a sole proprietorship.
  • Aside from the unlimited liability, you also have to realize that you cannot share ownership in a sole proprietorship or transfer ownership to somebody else.  Also, when you go away, the business ends.  With an LLC, your departure from this earth would, in most cases, result in a transfer of the ownership to your heirs.
  • You can always form an LLC later, when the business has grown, your cash flow has improved and/or you want to raise money by giving away some ownership of your business to another person.

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

5 comments

  1. What if my business is selling a product that I created myself (e.g., a software download or jewelry or a movie on DVD)? How does that fit into your second bullet point above?

  2. Imke Ratschko

    There is potentially product liability, so there is more risk. Still, if potential dangers from your product are unlikely and you can live with the risk……

  3. Somewhat i agree to sole or single ownership.

  4. You can hire employees as a sole proprietorship.

  5. While a sole proprietorship is simple and cheap, for someone who plans to grow his business, there are drawbacks beyond the personal liability issue.
    For example, while you are correct that you can always form an LLC later, contracts and licenses that you obtain in your own name (or for yourself “doing business as” the name of your sole proprietorship) may not be assignable to the new entity.
    Sole proprietorships are a smart choice in many cases, but the small business owner must consider all the relevant factors before taking that route. See: http://www.limitedliabilitycompanycenter.com/sole-proprietorship-vs-llc.html

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