LLC vs. Proprietorship: Pros & Cons of Partnership & Proprietorship

If you are thinking about starting a business, an important decision you must make right away is whether it is going to be a proprietorship with you as the sole owner or a partnership, which will include others as owners/partners.

This decision should be made on the basis of size of the business and how you are going to finance it.

Below are some pros and cons of each type of entity that you might want to consider before you make this important decision.

Pros and Cons of a Sole Proprietorship

Simple and Inexpensive

A sole proprietorship is easy to form and operate, since there is no one but you running the show. As a sole proprietor, all your profits and losses go to you; you will be liable for taxes and will file as an individual.

The requirements and restrictions are fewer in this type of organization as compared to others.

Freedom to Make Your Own Decisions

Because you are the sole owner of your firm, you can make your own decisions without having to seek permission from anyone else. There is a downside, however, because you are also the only person who can make mistakes in this arrangement.

A partner or partners might help you see things coming down the pike that you could miss on your own.

Personal Liability

In a sole proprietorship, you will be personally liable if you are sued by someone or if you default on a loan.

It’s possible that you could even be sued for amounts greater than all your assets. This could include not only business assets but also personal ones such as your home and car.

A major mistake could prove to be very costly.

Too Much Burden on Your Shoulders

Having a sole proprietorship could put too much burden on your shoulders since you will have to make all the major decisions by yourself.

Hiring staff could help, but they might not be as motivated to succeed as partners would be.

Pros and Cons of a Partnership

Increased Capital

Most partners will bring their own capital to the venture, and this could be useful if you are planning to start a business on a big scale.

Each partner will probably also bring in specific expertise that could be useful in running the business smoothly and profitably.

Personal Liability

Unless you have incorporated your business as a Limited Liability Company (LLC) or a “C” or “S” Corporation, you could end up paying for mistakes created by one of your partners.

This could prove to be expensive; therefore, you should seek advice from a good tax consultant or attorney before you enter into a partnership agreement.

Sharing Of Duties and Stress

A partnership allows you to take some time off if you are ill or just want a short break, which is very difficult if you own a proprietorship. This helps reduce stress – and you can come back from your break energized and ready to take on new challenges.

Even so, in a partnership, you will not be free to make and implement your own decisions, which sometimes leads to considerable stress in and of itself.

Continuing Business after a Partner’s Exit

If a partner dies or if they retire or leaves the business, then depending on the agreement you signed at the outset, your business should still be able to continue without any problems.

This is not possible in a sole proprietorship, especially if there is no contingency plan for passing it on to someone else.

Study the pros and cons of each entity carefully and hire a good consultant to help you choose the best possible organization for your business.

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