What Are the Advantages of a Single Member LLC Compared to a Sole Proprietor?

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When it comes to starting a business, choosing how to organize your business is one the most important decisions you'll make. The legal structure of a business affects many aspects of how it operates, from tax rates and deductions to how owners pay back business debts. Single member limited liability companies and sole proprietorships are two types of single-owner business entities.

Single Member LLC Basics

A single member LLC is an alternative to a sole proprietorship for owners who want to run their businesses as solo operations. Unlike a sole proprietorship, which you can create simply by engaging in business activity, to form a limited liability company, you must register your company with the secretary of state or similar state office by filing the appropriate organizational documents. The exact paperwork and filing fees vary by state, but you typically also have to include a certain suffix in your business name such as "LLC" or Limited Company." Setting up a business as a single member LLC instead of a sole proprietorship generally doesn't affect day-to-day business operations.

Limited Liability

The main advantage of operating a single member LLC over a sole proprietorship, is that LLCs limit the personal liability of the owners, who are known as members. Limited personal liability means that your business creditors generally can't come after your personal savings and property to satisfy debts related to your business. With a sole proprietorship, your personal assets are fair game. Running a company as a single member LLC may not, however, protect you from personal liability in all cases, such as if you make personal guarantees, sign on to debts in your own name or offer personal property as collateral for business debt.

Transferring Business Assets

Sole proprietorships are simple to start, but they can disappear just as quickly as you create them. If you own a sole proprietorship and add new investors or transfers business assets to a buyer, the sole proprietorship ceases to exist because it can't have more than one owner. A single member LLC can bring in new members and transfer assets without spelling an end to the company. Also, a sole proprietorship rarely survives the death or incapacity of its owner, according to a May 2005 Entrepreneur.com article.

Tax Similarities

Although single member LLCs and sole proprietorships have some major differences, they are similar when it comes to taxation. A single member LLC by default is taxed as a sole proprietorship. Both structures pass business income on to your personal income tax return, so you pay income tax on it just like wages, salaries and other ordinary income. Earnings from both types of businesses are also subject to self-employment taxes, which go toward Social Security and Medicare.