Starting a new business often means putting a great deal of your life on the line. You are willing to invest your time, energy and money in the hope that your business will be successful enough to support you and your family and perhaps become a legacy for future generations. Ideally, you can create a business using an entity that provides the least risk to you personally.
For a small business startup, most solo entrepreneurs choose between establishing a sole proprietorship or a limited liability company. Each has its benefits and drawbacks, so examining both entities carefully is a good way to determine which may be most appropriate for your circumstances.
Going it alone
Almost 90% of small businesses that have no employees are sole proprietorships. In general, this means that your business has one owner, you, who makes all the decisions and earns all the profits. It is an easy way to start a business since you do not need to file any legal paperwork aside from obtaining any licensing your operations require. A sole proprietorship will not complicate your tax returns much because your business is simply included in your personal tax filings.
Unfortunately, this is one of the drawbacks of a sole proprietorship. Mingling your business assets with your personal finances means the law sees no separation between you and the business. If your business incurs debt or faces a lawsuit, your personal assets are on the line as well. Creditors for loans for your business may have the right to claim your home and other valuables. This should be an important consideration when you weigh the options for your business entity.
Limiting your liability
An LLC, another common small business entity, does exactly what its name implies: limits your liability financially and legally. With an LLC, if the business cannot pay its debts or faces a lawsuit, only the business’s assets are on the line. As long as you keep your personal money separate from the LLC’s finances, a judgment against your business should not jeopardize your home or other assets. An LLC may also offer you tax breaks and other benefits your legal counselor can help you with.
Establishing an LLC is a bit more complicated than a sole proprietorship. You will have to choose a unique name, file appropriate documentation with New Jersey agencies, provide regular reports and pay administrative fees. Nevertheless, you may feel the trouble is worth the added protection.