Entrepreneurs and those involved with startup businesses in New York may wonder how to categorize their ventures. Even self-employed persons who handle a limited number of freelance jobs might have the same concerns. The option to form an LLC exists but opting to be a sole proprietor may seem easier for some. Ultimately, each individual situation is different, and an entrepreneur might need to look closely at both options to make an appropriate decision.
LLC vs. sole proprietorship
As the name suggests, a sole proprietorship refers to a business run by one individual. The person operates the business under his or her name, making it the common option for a freelancer or independent contractor. A person working for a rideshare company in between personal training gigs would likely file taxes as a sole proprietor.
An LLC, also known as a limited liability company, involves creating a separate business entity under state law. Often, an LLC involves several people coming together to form a business, although a sole proprietor could form a single-member LLC.
Legal issues to consider
An LLC offers certain protections since debts and other obligations do not become the personal liabilities of the owners. With a sole proprietorship, the owner becomes personally liable for debts. That’s a critical point to consider when making business formation decisions.
Forming an LLC requires paying specific fees and filing the necessary paperwork with the state. An LLC comes with additional paperwork and compliance rules a sole proprietorship doesn’t. Anyone planning on forming an LLC must prepare to accept additional expenses and responsibilities. Also, the formation steps should be free of errors and omissions, or the process may end up delayed.