What Should I Choose? Business Entity vs. Sole Proprietorship
Deciding to form a business entity at its core is a cost-benefit analysis, both of which could have significant consequences on you and your company’s success.
Pros and Cons of a Sole ProprietorshipA sole proprietorship is a person who directly owns all assets used in the business. A sole proprietor is not required to file a formation document, has complete control of the business and earnings are taxed and paid for by the owner on their individual tax returns.
It is a very flexible and low-cost business structure. However, one significant drawback to a sole proprietorship is that the owner is personally liable for all business debts, obligations, legal judgements and other liabilities so depending on the specific business risk profile, this model may be discouraged.
Pros and Cons of Business EntityMany business owners choose to form business entities because of a key advantage of limited liability protections. Some common business entities include Corporations (both S-Corp and C-Corp), Limited Partnerships (LP) and Limited Liability Companies (LLC). Additionally, because of entity-specific corporate formalities, there is increased credibility to the owner. This helps if the owner wishes to work with lenders and/or sophisticated customers.
Also, depending on the entity structure, the owner can still maintain the same "pass-through taxation" benefits as a sole-proprietorship without the risk. One potential disadvantage to the owner is a loss of absolute control of business decisions depending on the choice of entity and management structure.