What is the difference between incorporation, LLC and being a sole proprietor?

I’m starting up my own pool cleaning business. I’m not sure if Ishould just get my DBAor become an LLC or incorporate myself. In the case of LLC and incorporation, how to go about becoming one?

Asked on November 29, 2011 under Business Law, Oklahoma

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

A sole proprietorship means you and the business are legally one--there is no separate business. Any debts or obligations of the business are your personal debts (and vice versa). There is no protection from liability.

Both corporations and limited liability companies protect you from most (but not all; no protection is absolute) business debts or liabilities, by creating a separate legal entity. You will enjoy substantial protection from liability, which will protect your personal assets from business debts.

Corporations and LLCs can both be set up for "pass through" taxation, so even though they are separate entities, there is no separate taxation--profits and losses drop directly to your income, and you are only taxed once on your total income for the year.

There are a few fees--anywhere from, say $100 to several hundred dollars--involved in setting up a corporation or LLC; it varies by state.

There are some minor distinctions between corporations and LLCs in practice (the legal theory behind them is different, but that doesn't matter to the business person), but they mostly come into play for much larger businesses than you are talking about. For a small business, there is not much to choose between, though most people (myself included) find an LLC to be slightly easier to set up and administrate.

You can go to your state's Secretary of State of Dept. of Revenue websites to see how to set an LLC or corporation up yourself, or you can hire an attorney to do it for you.


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