In tax terms, the biggest difference between a sole proprietor and an LLC is that an LLC has what is called tax flexibility. This means that you can request that taxes be paid to you. In both an LLC and a sole proprietorship, the company's profits are transferred to the owner's personal tax return. However, LLCs have more flexibility when it comes to taxing, which can lead to tax savings.
Unlike a sole proprietorship or partnership, an LLC provides business owners with personal liability protections for any company action. In general, LLCs provide certain tax benefits and greater flexibility, and they also involve much less paperwork than C and S corporations. People who do a lot of contractual work, such as freelancers, consultants, and personal trainers, often choose to file their taxes as sole owners. When you open a small business, create an online store or start a side job as a freelancer, you ask yourself the question of whether an LLC or a sole proprietorship is the right legal formation for you and your needs.
However, the IRS gives LLCs the option of choosing how they will be taxed as an individual property, partnership, or corporation (S-Corp or C-Corp). Despite the significant benefits offered by an LLC, a sole proprietorship may be sufficient for your company's needs. An LLC can be owned by a single person (called a member), but it can also have more than one owner. Unlike an LLC, sole proprietors don't have to worry about mixing business and personal accounts from a legal standpoint.
That said, most experts continue to discourage mixing funds, as it can complicate taxes (and any possible audits that may be carried out). If your business needs additional licenses, permits, or zoning approvals, reduce them before applying for your LLC. It can be you if you're a single-member LLC, or one of your business partners in the case of a multi-member LLC. When a sole proprietorship has everything mixed up between the individual and the company, an LLC creates a legal wall of separation between the two.
When a company operates as a sole proprietorship, it simply begins to do business without forming a separate legal entity. Since you and the LLC are considered separate entities, you don't face any personal liability for business debts.
