Comparing an LLC to a Sole Proprietorship and a Partnership

Comparing an LLC to a Sole Proprietorship and a Partnership

The following section outlines the advantages and disadvantages of an LLC in comparison to a sole proprietorship and partnership.

Advantages of an LLC Compared to a Sole Proprietorship and a Partnership

Owners are Not Personally Responsible for Company Debts

This is the most important attribute of an LLC. In a sole proprietorship and partnership, the owners are personally responsible for business debts. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc., to make up the difference. By contrast, if an LLC runs out of funds, the owners are usually not liable.

Please note that under certain circumstances, an individual member may be liable for the debts of an LLC. These circumstances include:

  • If a member personally guarantees a debt.
  • If personal funds are intermingled with LLC funds.
  • If the LLC has minimal capitalization or insurance.
  • If the LLC fails to pay state taxes or otherwise violates state law (like defrauding consumers).

Easier for An LLC to Raise Money

An LLC has many avenues to raise capital. It can admit new members by selling membership interests, and it can create new classes of membership interests with different voting or profit characteristics. Plus, investors will be assured that they are not personally liable for company debts.

Ease of Ownership Transfer

Ownership interests in a limited liability company may generally be sold to third parties without disturbing the continued operation of the business. The business of a sole proprietorship or partnership, on the other hand, cannot be sold whole. Instead, each of its assets, licenses and permits must be individually transferred. New bank accounts and tax identification numbers are also required.

Disadvantages of an LLC Compared to a Sole Proprietorship and a Partnership

Cost of Set Up

It costs more to start an LLC and run it than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. These costs are partially offset by lower insurance costs.

Formal Organization

Although an LLC requires fewer formalities than a corporation, there is still more paperwork involved than a sole proprietorship or partnership. A sole proprietorship or partnership can open and operate without any formal organizing procedures - not even a handwritten agreement.

Separate Records

In order to maintain the separate form of the LLC and maintain the liability protection of its members, LLC owners must carefully maintain separate records and keep personal affairs separate from the LLC's business. Even more importantly, the LLC's money should never be intermingled with personal money.

LegalZoom can help you start a partnership or an LLC. Also,  if you’re going to do business as a sole proprietorship, we can help you apply for an official business name (called a DBA). Get started by answering questions about your business in our questionnaire, we check your answers for completeness and consistency, and then file the paperwork with the appropriate government agency on your behalf.