LLC or Sole Proprietorship: Which Business Structure is Right for Your Art Business?
Which business structure should you choose for your art business? LLC? Sole Proprietorship? In this article, we break down the ins and outs of both business entities and why you might choose one over the other.
LLC vs. sole proprietorship—these are two different business structures. They have different tax implications and different ways of separating (or not separating) you as a person from you as a business. Let’s take a look at what each one entails…
We are not lawyers and cannot offer legal advice. We encourage you to reach out to a lawyer or certified tax accountant for advice and further support.
Sole Proprietorship
A sole proprietorship is a business run by one person—you. This is the most popular structure for new businesses, because it’s the simplest to set up and run.
In this type of business structure, there’s no legal separation between you as a person and your business. In the eyes of the law, your business funds and your personal funds are all intermingled, and anything that happens to your business also happens to you personally (not to scare you, but if you get sued, for example, you’d be held personally liable).
Starting a sole proprietorship is easy—so easy, you may have already done it…. You actually don’t have to file ANY formal paperwork or take any steps to start your sole prop. You just have to start doing business. That being said, you DO need to make sure you’re registered for the proper permits as necessary (like a sales tax permit, for example, if you’re selling things). And, of course, you need to make sure you’re paying the proper self-employment taxes on your profits. LegalZoom is a great place to go to make sure you’re doing everything properly when you start your business.
If you’re going to be doing business under a name that’s different from your own, you need to register a DBA (‘doing business as’) for that name. Check with your county registrar to make sure the name isn’t currently being used, and then follow your local guidelines to file. You may want to go the extra mile to trademark your name to ensue you’re completely safe to use it. That’s a whole separate can of worms you might want to look into!
If you want to hire employees, you absolutely can! But you do need to have an EIN (employee identification number) to do so, which you can register for on the IRS website. You must also follow all state, local, and federal laws regarding those hires.
The Pros:
Inexpensive to create
No federal government requirements
No crazy legal documents to file
No one else to split profits with
Taxes are uncomplicated
Can hire employees
Easy to discontinue
The Cons:
Owner is liable for business debt
Limited access to capital (no partner)
LLC (Limited Liability Company)
In a limited liability company, the owner(s) are not personally responsible for debts and obligations; your personal assets are protected. That means that if you’re sued, unlike with a sole proprietorship, your personal savings, house, car, etc… aren’t on the line, because they’re considered totally separate from your business assets. This “limited liability” is the main reason people choose to register as an LLC over a sole prop.
To start an LLC, you need to register with your state and pay a fee. Some states require annual fees to maintain your LLC status. Depending on your state, you may have to have certain paperwork to file in addition—you’ll have to look into what your state requires. You can use LegalZoom or a similar service for the registration process, or have a lawyer prepare it for you.
You’ll need to be super diligent about keeping your personal funds separate from your business funds and tracking everything, since intermingling your personal and business money in an LLC could result in you losing your limited liability protection. Regarding taxes, “depending on elections made by the LLC and the number of members (owners), the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return” –IRS.gov. That’s a tad confusing, but basically it means that an LLC may use different forms and regulations for filing taxes depending on which of those options (corporation, partnership, or individual/sole prop) you choose. A CPA can help you make the choice.
Like a sole proprietorship, an LLC can also hire employees as long as it follows all guidelines and laws.
The Pros:
Protection of personal assets
Taxes are fairly easy to file
Can hire employees
May appear more “trustworthy” or “established”
Can include multiple owners
The Cons:
Registration fees and annual fees may apply (more expensive than a sole prop)
Requires more documentation and paperwork to file
To summarize—the biggest difference between a sole proprietorship and an LLC is that an LLC provides “limited liability” for the business owner that separates the business assets from personal assets.
If you’re concerned about potential lawsuits or debts, an LLC makes the most sense for you. If your risk of lawsuits or debt is low, you may prefer a sole proprietorship.
You can also always change your business structure. It’s very easy to start out as a sole prop and register later to become an LLC. So don’t feel super pressured to figure it all out right away. Just pick a place to start, make sure you’re doing it all by the book, and you’ll be just fine!