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Business Distinction: Sole Proprietor or LLC?

In my quest for personal business education, and out of an ever-growing desire for tax advantages, I started looking up that question: should I become a Real Business on paper, or keep going with just filing a schedule C?

LLC – Impressive Name, Not-So-Impressive Tax Benefits?

Thanks to a few reliable sources, here’s what I found out:

  • A Sole Proprietor (SP) can “freely mingle” personal and business items, though it’s recommended to keep ’em separated;
  • No specific accounting requirements for SP’s;
  • No legal distinction between SP owner and business (you ARE the business, quite legally);
  • No real tax difference between a Single Member LLC (SMLLC), a “disregarded entity” and an SP (“Yeah, we know you filed some fancy documents, but really, you’re the SAME”)
  • Personal liability – there’s no difference between you and the business. It cuts both ways.

SMLLC Label – Good for Editors?

  • Segregation: Keep business separate from personal, or you won’t get legal protection.
  • Assets: Even if a lawsuit may get the profits of the LLC, it will never get the actual (assets of) the LLC. This only works if you register assets in the LLC’s name, I’m guessing, though personal assets are protected from legal harm. Does a Mac count?!
  • Raising Money: Banks and future partners tend to be more impressed (i.e. willing to open purse strings) for an LLC than a sole proprietorship.
  • Intangibles: Better legal protection for transferring “intangible assets like contracts or permits to a buyer”. Hm. That might be important for an editor.

Dilemma – Important But Not Urgent

Since I don’t want to sell off my business assets (which are mostly intellectual property), or raise scads of money to open a storefront (ick!), it looks like sole proprietorship. I’ve finally done the responsible thing, and sent off yet another document for my tradename registration, in a bid for legitimacy. Since I don’t have any company debt, therefore I don’t need any assurances that nobody but me will be liable for company finances.

On the other hand, if I want to add on partners (to spread the work around), or more than one sub-contractor or employee, it might be an idea to have some separation between Business and Personal. I can’t imagine the trauma of trying to get the IRS out of my hair because I didn’t dot an “i” or cross a “t” when it comes to some meaningless-but-incredibly-important form.

Sometimes, I really wish that forms expressed a real state of being, rather than yet another layer of paper asking someone powerful not to step on you.

Reliable Sources:

  1. http://www.limitedliabilitycompanycenter.com/sole-proprietorship-vs-llc.html
  2. http://www.keytlaw.com/azllclaw/forming-llcs/llc-tax-methods/
  3. http://www.azsos.gov/sites/azsos.gov/files/bsd_tntm_filingchart.pdf

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