Can an LLC Be an Individual or Sole Proprietor?

Can an LLC Be an Individual or Sole Proprietor?
By Kimberly R. Edwards, CPA

Many people ask me this question and assume that if they are an LLC (I like to say it stands for Lawyer’s Likely Choice) they are protected and plus it sounds important. Here are the facts: a limited liability company (LLC) cannot be a sole proprietor, but an individual can do business as an LLC.  Confused?  Let me explain.

If you are a sole proprietor, you own and operate your own business, but it is not a corporation. A limited liability company is a business structure that is not a corporation and not a sole proprietorship. If you wish, you can register a business that you own and operate by yourself as a LLC, protecting you from business liabilities while still keeping the tax benefits of a sole proprietorship. For mostly small closely held companies, a good umbrella policy (cost is about $500 per year) will protect you just as well.  If someone wants to sue you, will they still be able to come after your personal assets if you are an LLC?  Yes.  It’s called “piercing the corporate veil”.

Sole Proprietor Basics
As its name implies, a sole proprietorship is a company owned and operated by a single person. If your business is not a corporation or limited company and you are the sole owner of your business, it is a sole proprietorship. As a sole proprietor, any business income you earn is considered personal income when you file your taxes. The downside of setting up your business this way is you are personally liable for any money your business owes and are personally vulnerable for any lawsuits filed against your business.

LLC Basics
An LLC is a hybrid business that marries some of the features of a corporation with some of the features of a sole proprietorship. Unlike a sole proprietorship, if you are registered with the government as an LLC, your business assets and liabilities are legally separated from your personal assets and liabilities. Moreover, unlike a corporation, income you earn from your LLC is treated as personal income, just like it is if you are a sole proprietor.

LLC Members
Owners of an LLC are considered members, not shareholders. An LLC can have an unlimited number of members. If an LLC has more than one member, profits and losses of the company are divided based on their membership percentages. Each member writes off their portion of losses and reports their portion of income on their personal tax returns. If you are the only member, you record all company profits and losses on your tax return in the same way as a sole proprietor.

Tax Benefit
Both sole proprietorships and LLCs have a tax advantage over corporations. Corporate profits are taxed, and then corporate shareholders are taxed on dividends and capital gains they earn. This constitutes a form of double taxation. If you establish your business as an LLC or sole proprietorship, you avoid this double taxation as company profits are taxed only one time as personal income.

Seeking out professional help like The Edwards CPA Group will help you select the right choice for yourself and your family.