There are a ton of differences here. Honestly, the first step may just be a google search, tons of resources out there to get you started on figuring it out. Come back with more specific questions and the things you have learned. Teach us a bit!

 

LLC vs. Sole Proprietorship

 

Don't take this as legal advice, but general insight.

An LLC is essentially a small business that you create to employ yourself. With an LLC, if you get sued for some reason you're unlikely to lose your personal assets, only those associated with the business (this is why it's vital to have a business bank account). Also, an LLC offers tax benefits that a sole proprietorship does not. A sole proprietor is acting both as a business and an employee, and thus your personal assets and business assets are one in the same. An LLC has stringent reporting requirements and has a fee schedule specific to the state in which it's registered. Interestingly, the state in which an LLC is registered is a very important consideration. You will notice many US companies being incorporated in Delaware. That's because the state bylines for LLCs in Delaware are straight up utopian in many ways. If your LLC goes bankrupt, well, it dissolves and you walk away. If your sole proprietorship goes bankrupt, you go bankrupt.

That's about as much as I can confidently disclose, since I'm not a lawyer or accountant. As others mentioned, read up on it, maybe even get in touch with a small business lawyer.

- Cheers

 

When you sell products or services, you automatically are the sole proprietor (person in charge) of your own business... unless you pay a state government to have a different status.

As a sole proprietor, in terms of accounting, taxes, contracts, and lawsuits, there is no difference between you and your business. You might park some business money in a separate account. But that would just be for your own convenience, or because you felt like it. If you owe taxes or you're sued, the tax man or court judge will put that account together with everything else you own.

You might want to do business with a different name than your own. Unless you had really weird parents, you're probably not legally named Greatest Products Ever. You could file some paperwork with the local government, which would let you take checks payable to Greatest Products Ever. This is a Doing Business As (DBA) filing and it's up to your local state or county how much they charge. It doesn't change that the business is still a sole proprietorship.

When there were voyages of exploration around the world, some people wanted to put up the money and send someone else out on the ship. The corporation was a legal structure invented around the year 1600 to make that possible. Every combination of business arrangement is possible with a corporation, and it's well understood. To file a corporation, you pay your local state government a few hundred dollars. They create a corporation and you own it. Or you can pay a different state government, but you might still have to pay your local state too.

Supposedly a corporation can have its own contracts and loans separate from you. But if the corporation has no money or assets, you'll need to provide a personal guarantee anyway in the contract... putting you right back where you were as a sole proprietor, but with a lot more paperwork to file.

Just about every billionaire is mostly rich from owning stock in a corporation. They usually don't have a billion in cash, that's the total value of all the stock they own, if they sold it at today's price.

A corporation is set up so owners can resell their shares on a stock market, vote for a board of directors, who hire management executives, who set up separate bank accounts for the corporation and hire employees, etc. If that becomes important, you can do it, but if you don't keep the paperwork up to date, the court will "pierce the corporate veil" and decide you still have a sole proprietorship anyway.

If it's just you, usually there's really no point to do that paperwork.

A few decades ago, many states wanted to offer something simpler than a corporation. The Limited Liability Company has some of the features of a corporation, but less paperwork, so it's a lot easier to do the administration. It's also filed on a state by state basis. But, because it's so new, the laws and court rulings aren't as standardized or predictable.

There are also partnerships and trusts, but I won't get into them now.

The important thing to know is that each option has DIFFERENT rules about how taxes work, how accounting works, what happens if the business is in a lawsuit, what happens if the business goes bankrupt, and how to resell part or all of the business.

Most local governments have an Economic Development Department, and most towns have a Chamber of Commerce, that put on free info talks about this subject every month at the public library. Go to your local librarian and ask, it'll be easy to find out when the next free intro seminar is in your area.

If you make no money, the legal structure makes no difference.

Once you have some money, then it makes sense to buy a legal structure if it matters for your unique situation. A local attorney, tax expert, and general business accountant, can give you customized advice. If you can't afford a few hundred dollars for these consultations, you probably don't need to spend a few hundred more to get a corporation or LLC.

 

LLC : Forming an LLC limits the members’ (or owners’) personal liability for business actions. Members are liable, but usually only to the extent of their investment in the business. This means that member’s/owner’s personal assets cannot be used for settling business debts. This differs from a regular partnership, where all members or at least one is liable for company debts.



Sole Proprietorship: A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one natural person and in which there is no legal distinction between the owner and the business.