Sole Proprietorship vs. an LLC in Maryland

• February 9, 2022
• Business Formation & Planning

Whether you’re starting a business or thinking about changing the legal entity owning it, you may want to know the costs and benefits of a sole proprietorship vs. an LLC in Maryland. Is it better to have an LLC or a sole proprietorship? That depends on your priorities. The attorneys at Lusk Law, LLC will be happy to discuss your options and do the work necessary to make it happen.

What Legal Entities Can Own a Business?

You Have Many Options. One Will Be a Better Fit Than the Others.

The four most popular business structures are:

• Sole proprietorship
• General partnership
• Limited liability company (LLC)
• Corporation

More than one person or entity owns a general partnership. Instead of one owner, as in a sole proprietorship, multiple parties (or partners) own it. They all own its assets and can share in its income, but they’re also potentially personally responsible for the business’s liabilities and debts. One partner could also bind the others to agreements.

A corporation is owned by shareholders or stockholders, overseen by a board of directors, and run by corporate officers. Shareholders generally aren’t personally liable for the business’s debts and liabilities. But they face double taxation, because the corporation profits can be taxed, and income through dividends or income (if the shareholder is an employee) can be taxed as well.

If you choose an entity other than a sole proprietorship, an agreement between all the owners on the function and focus of your company, along with rules about ownership and management, could prevent or lessen a wide range of potential problems down the road.

What is a Sole Proprietorship?

If you start a business by yourself and do nothing to create a legal entity, you have a sole proprietorship by default. You’re the sole, direct owner. You own the assets and earn the revenue but you’re also personally responsible for your company’s debts and liabilities. It’s the simplest and most common business entity ownership.

What is an LLC?

It’s a mix of corporate and partnership structures. It limits the liability and tax exposure of owners (or members) while having some of the flexibility of a partnership. An LLC can have more than one member, conduct any lawful business, purpose, investment, or activity, whether for profit or not, but it can’t act as an insurer, according to Maryland law. An LLC could exist practically indefinitely or must stop at a certain time. It can enter contracts, undertake obligations, and do business as directed by its members.

Is it Better to Have an LLC or a Sole Proprietorship?

Talk to Us About Your Business and Your Goals. Lusk Law LLC Can Point You in the Right Direction

Each business form has plusses and minuses. Would a sole proprietorship work best for you? Here are the benefits:

• Simpler and easier: You have no board of directors, no need to take minutes of their meetings, no reports to file, and no partners or shareholders to argue with. Your tax filings should be easier than if you formed a corporation, because legally and financially, you and your business are the same. Though it’s a good idea to keep separate bank accounts for your business, you don’t even have to do that.
• Lower start-up costs: If you don’t have many resources to begin with, a sole proprietorship can cut some costs. No need to set up a corporation, pay filing fees, or hire an attorney to put it together.
• Management flexibility: Take your business in one direction and if it’s not working out, take it in another. Close up shop or double its size. They’re your decisions to make and when you own and run a business, you’re calling the shots.

Whether the costs of a sole proprietorship outweigh the benefits is up to you:

• Personal liability: You are potentially personally liable for all debts and actions of the company. Though you can limit your exposure to liability through business insurance, your personal assets and wealth are at risk if you go in debt or incur bills you can’t pay. If your business needs loans to get by or your product or service is more likely to result in legal action, sole proprietorship may not be the best choice.
• Financial controls: The company’s finances will only be as disciplined as you are. Since there are no required financial statements or board of directors over you, if you lack accounting controls it can cripple or end your business.
• The buck stops here: You have control so all the decisions and choices are yours, as is the success and failure. No one can do all things well. Your business may be stronger if you have a partner, fellow shareholder, or another member who complements your skills or experience and is able to do important work better than you.

If a sole proprietorship isn’t your best option, maybe an LLC will better meet your needs. Here are some of the advantages to using an LLC to own your business:

• Members have limited liability exposure like shareholders, and it avoids the double taxation that comes with a corporate entity.
• It’s almost as simple as a sole proprietorship if the LLC has one member.
• LLCs aren’t tangled up in rules that apply to small corporations. They can have more than a hundred members; they can be foreign citizens, corporations, trusts, other LLCs, and partnerships.
• An LLC may be a good choice for a real estate investment because it has tax advantages over partnerships or small corporations.

There’s no free lunch with business entities, and LLCs have some disadvantages:

• An LLC isn’t a good choice if in the future you want to publicly trade its ownership (because there are no shares or stocks) or raise venture capital.
• Flexibility in management and operation is generally a plus; but unless you prepare an operating agreement, dealing with rogue members can be difficult.
• An LLC member can’t pay themself wages, but they can draw out money they invested and receive profits.

Is a Single Member LLC the Same as a Sole Proprietorship?

They’re different types of ownership with their own requirements and rules. Though an LLC is a little more complicated, if you’re the only member, you have the same degree of control as a sole proprietor while getting the personal liability protection of an LLC.

Contact Our Experienced Maryland Business Lawyers

Do Your Homework, But Consult with Experienced Business Attorneys Before Making a Decision.

Maryland business law attorney Rebekah Lusk and her associates are experienced in helping others face business challenges. Whether you’re starting a business or currently own one, at Lusk Law, LLC, there is no boilerplate approach to clients. Each client’s situation is unique, and we will provide advice and services that meet your needs.

Contact the Maryland business law attorneys at Lusk Law, LLC to gain a long-term ally for your business. Call (443) 535-9715 today for consultation. We are advocates for life’s obstacles and opportunities.