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The Pros & Cons of Sole Proprietorships, LLCs and Corporations

Lucere Legal helps small business owners form companies
Categories: Business Formation

Thinking about starting your own business?  One of the first things you will need to consider is what type of business entity is best for your new endeavor.  There are pros and cons to each and it is a good idea to consult with an experienced business lawyer before you make your decision:

Sole Proprietorship – nearly 75% of all American businesses are run as a sole proprietorship. Here are a few of  the pros and cons:

Pros:  They are easy to start,  the owner keeps all the profits, the business income is taxed as personal income, and the business can be dissolved easily.

Cons:  The owner is liable for all business liabilities and so their personal assets are vulnerable to creditors, it can be difficult to raise investment capital, and the business does not survive the owner.

Limited Liability Companies (LLCs) – the owners become “members” of this legal entity, which can offer the taxation benefits of a sole proprietorship with the limited liability protection of a corporation.

Pros:  The owners are protected from personal liability for business liabilities, the business income is taxed as personal income, and there is great flexibility of ownership and governance.

Cons:  LLCs are not recognized in every state (although they are in Minnesota), and the owners not obligated to consult with other owners for certain business transactions.

Corporation – a corporation is an entity that is entirely separate from its ownership, with its own legal rights.

Pros:  The owners are protected from personal liability for business debts and legal claims, shares of stock can be sold to raise capital, it is easy to transfer ownership,  the entity can outlive the original owners, and c-corporations qualify for the most fringe benefits for the owners.

Cons:  The owners must pay taxes twice – on the corporation’s income and the income earned personally from the corporation, and there are strict governance rules that must be followed.

To learn more, check out our Business Set Up page and download our Guide to Corporations, LLCs and Partnerships.

If you’re a small or mid-size business owner, or you would like to be one, call us at (612) 206-3701 or fill out our contact form today to schedule a business consultation session.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

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