Starting a business is an exciting venture, but choosing the right business structure is one of the most important decisions you’ll face. Two popular options for entrepreneurs are sole trader and Limited Liability Company (LLC). Each comes with different advantages, responsibilities, and implications for your financial future.
This blog will talk about what it means to operate as an LLC or sole trader. We’ll also discuss the best ways to figure out which path best aligns with your entrepreneurial goals.
What Is a Sole Trader?
A sole trader is the simplest type of business you can set up. You’re considered a sole trader if you work for yourself. Some examples of sole traders include:
- Taxi drivers
- Painters
- House cleaners
- Plumbers
There isn’t a legal distinction between you and your business when you’re a sole trader. This means you have full control over decisions relating to your business. However, you’ll take on all financial and legal responsibilities when you’re a sole trader.
Some of the features of a sole trader include:
- You have complete control over your business decisions
- Your business income is taxed as personal income, making tax filing easy
- You are personally responsible for all business debts and legal actions
- Few formal registration requirements and lower administrative costs, making less paperwork
You’ll need to ensure you have a dedicated bank account for your business when managing your finances as a sole trader. Keep in mind that it’s not legally required to keep your business and personal finances separate, but it makes things a lot easier.
However, opening a sole trader bank account, like those offered by Narvi, makes it easy to keep your personal and business transactions separate. Other benefits include streamlining tax preparation and expense tracking. Managing your finances increases your business’s credibility and helps ensure its growth.
What Is an LLC?
A Limited Liability Company (LLC) combines different elements from other types of businesses. LLCs are one of the easiest ways to structure your business. They’re also fairly easy to get started.
What’s great about starting this type of business is that it protects the owner from being personally liable for their business. Some of the important features of an LLC include the following:
- Your personal assets are protected from business debts and legal claims
- LLCs can choose to be taxed as a sole proprietorship, partnership, or corporation
- Operating as an LLC can improve your business’s reputation
- Requires formal registration, annual filings, and compliance with state regulations
An LLC provides business owners with more legal and financial safeguards than other types of business structures, like a sole trader. This makes it a great choice for businesses with higher risk or those planning on growing in the coming years.
Comparing Sole Trader and LLC Structures
Trying to figure out what type of business structure is the best option can be overwhelming. Let’s talk about some of the main differences between LLCs and sole traders:
- Liability: Sole traders are personally liable for business debts, while LLC owners enjoy limited liability protection.
- Taxation: Sole traders report business income on their personal tax returns, and LLCs have flexible taxation options.
- Registration: Sole traders don’t have a lot of registration requirements, and LLCs need to comply with state-level registration and pay annual filings.
- Management: Sole traders have full control over decisions, while LLCs sometimes have multiple partners managing the business.
- Bank Accounts: It’s not legally required for sole traders to open a dedicated business account, while LLCs are expected to
- Credibility: LLCs often appear more professional and credible to clients compared to sole trader businesses.
Is an LLC or Sole Trader the Right Choice for You?
Many business owners, like consultants or freelancers, start their businesses as sole traders. This may be a good option for you if you’re a new entrepreneur and want to test your business idea.
An LLC might be a good fit for your company if you want to keep your finances separate from your business’s. Keep in mind that you may need to pay a filing fee to your state to get your LLC up and running. You’ll also need to pay a yearly fee to keep your business in good standing.
The business structure you pick depends on a lot of factors that are usually unique to you and what you want to achieve. Some of the things you might want to ask yourself include:
- How much risk will my business face?
- Do I want easier taxes?
- Am I planning to grow my business or work with partners in the future?
- How important is professional credibility to my clients or customers?
Answering these questions will help make the process of choosing a business structure easier. It’s also recommended to work with professionals who can help you with the decision process.
Final Thoughts
Deciding between being a sole trader and forming an LLC is an important step for your business’s future. While sole traders enjoy simplicity and full control, LLCs provide liability protection and growth flexibility.
No matter your choice, managing your finances wisely through tools like a sole trader bank account or business banking solutions will set you on a path to long-term success. Consider consulting with a financial advisor or legal professional to ensure you’re making the best decision for your business journey.
