6 Differences Between An LLC And A Sole Trader

+Small-to-medium-sized businesses often turn to one of two business structures when setting up their company: a sole proprietorship or a limited liability company (LLC).

It’s vital to choose the right business structure from the outset, as this will have an impact on several factors including liability, taxes and other legal obligations that are expected of you and your firm.

Besides that, there are several other key differences between these two types of businesses. Here are six notable differences between an LLC and a sole trader.

1) Definition and scope

A sole trader is an unincorporated business run by a single individual and is deemed one of the simplest business structures you can apply for. All the profits of the business go to you, but at the same time, you have to shoulder any debt that the business may incur. This extends to the owner’s personal belongings, which means that banks can seize your car, property, and personal funding if the business is unable to pay its debts.

An LLC, on the other hand, is a bit more formally recognised and can have several members at the top. Finances within the business are separate from personal finances, and you’re personally guarded against any lawsuits aimed at your employees. This type of business structure is often chosen by businesses that are looking for investors or want to protect their assets from possible lawsuits.

Read more info about LLC’s by LegalVision in their comprehensive guide.

2) Cost for setting up

Setting up a sole proprietorship isn’t only easy, but it’s also more cost-effective than setting up an LLC. This makes it ideal for businesses that are starting up on a shoestring budget.

One fee that you have to pay as a sole trader is the business registration fee. This is a recurring annual fee that’s paid to the government for your business license. The amount you pay will differ based on the state or country you’re operating in.

Another cost to factor in for your business is bank fees, which can differ based on the size of your enterprise and the financial institution you choose.

On the other hand, prospecting LLC owners will have to establish a more comprehensive legal identity. Aside from paying a business registration fee, they also have to reserve a company name and register their company. This can cost upwards of up to AU$600.

3) Finances and taxes

In sole trading structures, the individual and business are one and the same when it comes to finances and taxes. This means that your personal and business funds don’t need to be separated, as is the business income. That said, it’s still common practice for sole traders to open a business checking account to organise and file tax work more efficiently.

However, LLCs will require members to maintain a clear distinction between personal and business assets. This will require more paperwork and ongoing fees compared to a standard sole trader company, but it comes with the benefit of granting your business a sense of legitimacy while also building up business credit.

All members in the LLC will also have to file personal and corporate tax returns, which will have to undergo an annual review by the Australian Securities and Investments Commission (ASIC), among other important filing duties.

4) Profit and losses

Sole traders have full ownership of their business, and as such, they are the rightful owners of the income that the business incurs over a designated period. For profits, they get to keep it as part of their individual income. However, losses will also be shouldered by the sole trader themselves, which can resort to using personal assets to sustain the business.

Meanwhile, LLCs distribute losses and profits to each member based on their share in the business. Shareholders don’t have to worry about losing their personal assets if the business goes under since it’s legally protected. However, they’re also not immediately entitled to the profits that the business generates.

5) Control of business

As a sole trader, you’re essentially the captain of your own ship. You don’t have to answer to anyone but yourself, and your business resilience is put to the test. Naturally, this entails a lot of responsibility, but it can be empowering for those who want to be in complete control of their business.

An LLC, on the other hand, is managed by a board of directors. This means that there’s a clear hierarchy in place, and decisions have to be made as a democratic collective. Board members must uphold their company’s constitution and make decisions that would benefit the business as a whole rather than themselves. Even if you’re just a single director, you’ll have to record any business decisions as resolutions of the company.

6) Business closure

The process of closing a business is different for LLCs and sole traders. For the former, members will have to follow the process stipulated in the company’s constitution. This usually involves appointing a liquidator, notifying ASIC, and holding a meeting among members to resolve the issue. Board directors will also have to deregister their business and dissolve it as a legal entity.

Closing a sole trader business, on the other hand, is a bit simpler. All you have to do is inform the ATO that you’re no longer operating. You’ll also need to cancel your ABN and business name to formalise the closure.