LLC vs Sole Proprietor...
"What's best for my business?"
How to start a business
You may be setting up your company and your business entity for the first time, or you may already have a business and you want to make sure you’re set up correctly as either a Sole Proprietor or an LLC.
Most people don’t even know what the difference between a sole proprietor and an LLC, let alone which one is right for their business.
In this video I’m going to explain the main differences between a Sole Proprietorship and an LLC, and which one is best for your business, depending on what stage you’re at.
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What going on everyone, my name is Ravi Abuvala, founder of ScalingWithSystems.com. When we help entrepreneurs grow and scale their business using automation, elimination and delegation. In this video, I’m going to walk you through exactly what a sole proprietorship is, what an LLC is, and how to know which one to choose. At what point in your business. Now, as usual, anytime I talk about entity structure or payroll or accounting or tax or you know that I haven’t let you guys know I am not a lawyer, I’m not an accountant. Please, please, please seek professional guidance if you’re about to make decisions regarding your business.
This is just something that I know from being a business coach, a business consultant, from creating multiple companies, as well as helping others create their companies inside of scalable systems. When I first got an entrepreneurship and I created my first company, Prospect Social and Advertising Agency, I was not focused on like entity structure or taxes or payroll or anything like that. I was just trying to figure out can I make money online and leave this law school rat race for me, to be honest with you. I didn’t want to devote everything into this yet. I didn’t want to fully jump in because I was afraid like. Can I even be a business owner? Do I have what it takes to actually be an entrepreneur? And I knew the only way I could figure that out was that people were willing to pay me money, not if I just had some kind of beautiful LLC or entity structure.
That said that I owned a business, so I spent my time wisely, like learning new skills, learning how to pivot myself and put myself as an authority in the marketplace, doing lead generation sales calls. And of course, being rejected 95 percent of the time. When I first started out, it really wasn’t until I started hiring a bunch of employees and I had my first end of the year tax returns and I started making a little bit of money that I actually learned about the importance of entity structure with things like Elsie’s and how they can really protect you in case anything were to ever go wrong. So first, I’m going to break down exactly what a sole proprietorship in an LLC is. And I’m also going to show you exactly when you should be choosing which business based on where you’re at in your company.
So what is a sole proprietorship? It is essentially the simplest and most common form of a business structure, and it’s pretty much when the government sees you and the business as one and the same. If you have a quote unquote business and you’re taking payment from other people and you’ve never said anything up with legal paperwork, there’s a good chance that if you’re in the United States, you’re already considered a sole proprietorship. There really are no real like paperwork or any kind of headaches you have to have when you’re setting up their sole proprietorship.
And so it’s the honestly the best option for those that are just starting in business. They don’t have a lot of personal assets and they just want to start making money as soon as possible without putting too many legal obstacles or paperwork in the way. All that being said, that ease of set up also comes at a cost. There are some serious disadvantages to setting yourself up as a sole proprietorship due to the fact that the government sees you and your business as one and the same. You are liable as a person, as you yourself, as a person, in case anything were to go wrong on the business side. Those bad things can include stuff like going into debt or getting sued by somebody else.
And I know what you’re thinking. Rubbish. I’m not going to get sued by somebody else. Well, let me tell you a little bit secret. Everyone. Nobody goes into a business thinking they’re gonna get sued by somebody else just the same way as nobody goes into marriage thinking they’re gonna get divorced. But that’s why there’s stuff such as prenups. An entity structure like LLC is because you always need to prepare yourself for worst case scenario so that you don’t lose everything you own. So let me give you an example. All right. So let’s say that you’re a sole proprietorship and you’re in business and somebody sees you. It’s an unfortunate incident, but it does happen.
And because they’re suing the company, right. You did something for them. And because you did that thing for them, something bad happen to them. And for that reason, they sued you. So they’re suing my company. But in reality, because I’m set up as a sole proprietorship, the government sees the company and me as one and the same when it comes to legal liability. And so for that reason, they’re suing me personally. So let’s say the house that I bought for my mom or the first house that I bought even way long before I created that sole proprietorship, I sort of create my own business that I made, you know, washing dishes or whatever it is now that’s going to be at risk.
Even though I had that an owner totally prior to having the business and it has nothing to do the business, but because I’m a sole proprietorship and I’m one and the same, that’s going to be at risk to say I lost the lawsuit. So sole proprietorships are the easiest way to start a business and I do recommend it. When you’re at the zero to 40 to $50000 a year mark and if you don’t have a lot of personal assets, but it’s also the most risky, at some point your business will become a little more complex. Maybe you’ve made a little bit of money now. Above the $50000 a year mark, you have your own personal assets you want to protect. At that point, I always recommend once again, not as a lawyer and economy, but just as a business consultant for my clients to create what’s known as an LLC or a limited liability corporation. So what is a limited liability corporation? Well, to be honest with you, the name kind of gives it away. A limited liability corporation is where your your liability for that corporation is limited.
I know that sounds silly, but actually just break it down. It essentially means that the government sees you and your business as two separate entities. So now, in case anything were to happen with your business, it won’t actually come and affect you personally and your personal assets. Now, LLC is do require a little bit more paperwork. There are some annual fees and registration fees that you can use whenever you set it up. However, it’s really not that difficult. And if you had any kind of personal assets or you’re working in an industry that could be considered at high risk for things like lawsuits or debt, then it really is smart for you to set that up from the beginning so that you’re always in the crystal clear whenever you’re doing any business and you know that your own personal assets won’t be affected. Most people think they have to hire a bunch of fancy lawyers or that they need to go to Web sites like in Web sites like LegalZoom in order to make all this happen.
But I’ll be totally honest, you guys. I just want the Florida Department, the Florida Department of State on the Web site, not things like sunbeds, dot org. And I created my first LLC in a matter of 20 minutes with zero additional filing fees than exactly what the government charged me. Once again, I’m not a lawyer, an accountant, so make sure you consult your own before you make a decision. So in the LSC, because the government sees you and your business as two totally separate entities in case anything were to happen to just you or anything were to happen to just your business. It doesn’t cross over. It doesn’t co-mingle. So you’re protected on each side from losing everything in your life.
So to sum everything up, a sole proprietorship is the common and the easiest way to start your own business. But at the same time, it’s also the most risky. So I only recommended for people that are making less than $50000 a year in their business and don’t have a whole lot of personal assets that they can lose. An LLC is a business set up, a business entity where essentially you and the business are seen as totally separate entities and thus in the eyes of the government in the law, if anything were to happen to your business, it doesn’t come against your personal assets. So it does require a little bit more startup work, a little bit of paperwork and a little bit of costs. But it’s worth in the long run if you’re making over $50000 a year or of any personal assets that could be at risk in a lawsuit or in case you foreclose or go into debt.
The final question I always get about LLC and sole proprietorships is what’s ones better when it comes to taxes? So I don’t got to gabled Uncle Sam all of my hard earned dough. Well, in reality, when it comes to actual taxes, it’s when he gets a little confusing. The government sees a silver partnership and an LLC as one and the same when it comes to actually taxing it. So I wasn’t even as an LLC, at the end of the year, you’re going to put the gains and losses from that company on your own personal tax return and Reality and LLC, the sole proprietorship or probably in my own opinion, the worst tax setups that you can have for your company.
The nice thing about LLC is however, as you can alecks to be taxed as something like an S corporation or a C corporation where there’s a lot of different avenues that you can use there in order to save hundreds, thousands, tens of thousands, even millions of dollars in taxes every single year just because you elect to be taxed differently. I won’t get too much into the corporation set up for your LLC here for tax reasons just because it’s going to be very, very long as it’s honestly where the whole separate video. So if you want to learn a little bit more about how I have my LLC setup as an S corporation, make sure your common down below and I’ll do a separate video on that for you.
Okay, so now you know which entity structure is gonna be right for your business depending on where you’re at. But you know, once you have the business form, what type of business you’d be running or what your service or product should be, or even how to scale and grow the business so that you can remove yourself from it.
I will invite you to a free course I created called the Three Steps to Scale. That’s actually how I created two companies to seven figures in under two years. And I walked through the exact steps that I use over to make it. And we cover what business models you should be using, what services you should be offering, and how exactly you should be generating leads for those different types of business models. So the link to that is going to be in the description below. I recommend you get access to it right now.
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