One of the first decisions you have to take when you start your own business is the company form in which you will conduct the business. This article is aimed at you who starts the company itself, thus where you will be the sole owner. For you, the question is whether to choose a limited liability company or sole proprietorship, since partnerships require more than one owner.
I can already say that many will probably say that limited liability companies are always the way to go. I remember, for example, how a teacher of Business Law pointed out that there are no reasons to start a sole proprietorship because Joint-Stock Companies always offer better legal protection. Surely he was right in terms of protection, with it being a little more going into the election than that. Therefore, we have compiled the main questions that will help you navigate the choice between a limited liability company and a sole proprietorship.
Will the business involve financial risks?
A major advantage of the limited liability company is drawing a clear line between your personal and business finances. This is due to the fact that the Joint-Stock Company is a legal entity that can conclude contracts and indebtedness. If the Joint-Stock Company is unable to pay its claims, in the worst case it becomes bankrupt. You as the owner lose the money you invested in the company, but there ends the misery, you do not become personally liable for payment.
In a sole proprietorship, you as a private person are responsible for the company’s financial obligations. It can have far-reaching negative financial consequences if the business does not go as intended.
Thus, if your business requires large investments, loans, or extensive orders, it is best to conduct it in limited liability companies.
Are you ready to bet and invest?
Maybe you try self-employment to a lesser extent. If you do not know how your business will develop, a sole proprietorship may be preferable. This is because the sole proprietorship is easier to start and does not require any start-up capital. However, to start a limited liability company, a share capital of at least $2.850 is required from the owners.
If you notice that the company is developing in a direction that involves greater financial risk, you can transform the sole proprietorship into a limited liability company.
How much salary do you plan to charge?
In a sole proprietorship, your salary is the same as the company’s earnings. For a limited liability company, you can choose to take a part salary and part dividend. Since the dividend is taxed differently than the salary, you can tax plan your salary more dynamically in a limited liability company.
It is not always advantageous to withdraw the salary from a limited liability company and it is required that the profit in the company exceeds the so-called breakpoint, which for 2020 is $58.000 above that amount, you pay state income tax on the salary, which makes it advantageous to withdraw part as dividends.