Limited liability companies (LLCs) and sole proprietorships are some of the most common types of businesses, and each offers unique advantages. Both are what are called pass-through entities, meaning that profits and losses flow through to one’s individual tax return. LLCs, however, limit the liability of the operator to business assets, whereas sole proprietorships have no liability protection at all. LLCs also cost somewhat more in terms of filing fees and other required expenses.
Choosing whether to operate as an LLC or sole proprietorship is thus primarily a question of how much liability one’s business exposes the owner too. A business that makes simple craft goods, such as custom jewelry, will likely be fine as a sole proprietorship. A business with significant potential liability, such as any sort of food preparation service, should look at an LLC instead. If someone becomes ill or injured as a result of the product or service, the operator of an LLC can only lose business assets in any resulting legal action, whereas a sole proprietor can lose property, investments, or other personal assets.