What Is The Difference Between A Sole Proprietorship And An LLC ...

Are you self-employed and wondering whether you should form a limited liability company (LLC) for your small business? Before you take the plunge, read on to make sure you understand the difference between these two business entity types.

A sole proprietorship is an unincorporated business owned by one person. Other common synonyms for a sole proprietor include self-employed, independent contractor and freelancer. Your business is not a corporation or a partnership, and you report your business income and expenses on Schedule C as part of your personal income tax return (Form 1040). Other tax forms may also be required, such as Schedule SE (to report self-employment tax on your profit), Form 4562 (to report business asset purchases and depreciation expense) and Form 8829 (if you have a home office).

A limited liability company is a legal entity formed according to the laws of each state. Typically, a LLC is created by filing documents with your state?s business department (sometimes called the office of the Secretary of State) known as the Articles of Organization. A LLC can be owned by one person (a single-member LLC or SMLLC) or by more than one person (a multi-member LLC or MMLLC).

For tax purposes, a LLC can choose how it wants to be taxed. A SMLLC can be taxed as a sole proprietorship or a corporation. A MMLLC can be taxed as a partnership or a corporation.

So if your business is currently a sole proprietorship and you then convert it to a LLC, you can continue to be taxed as a sole proprietorship even though your business is now a LLC for legal purposes. You would continue to file Schedule C and you would put the LLC?s name at the top of the form instead of your personal name.

You also have the option of being taxed as a corporation. To choose C Corporation tax status, you file Form 8832 with the IRS. You would file a corporate income tax return on Form 1120. To choose S Corporation tax status, you file Form 2553 with the IRS. And you would file a corporate income tax return on Form 1120S.

Whether or not you should convert your sole proprietorship to a LLC, and how your new LLC should be treated for tax purposes, is a challenging decision involving several critical factors. Before making a change, be sure to do some research and consult with a tax professional who is well versed in the issues of choice of entity.

Source: http://www.businessmanagementdaily.com/29953/what-is-the-difference-between-a-sole-proprietorship-and-a-llc

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