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Interesting facts you did not know about sole proprietorship vs LLC

March 17, 2022by Harneet Bhatia0

A sole proprietorship business is an unincorporated owned by one individual. Once you are aware of the differences between sole proprietorship vs LLC, you can know that an LLC is a separate legal entity that provides liability protection for its owners.

There are four types of different businesses, but today we are going to focus just on two of them. We will evaluate the differences between sole proprietorships and LLCs, as well as discuss how to find the best one for your company.

1. What is a business entity?

Let us start by defining what a business entity is. It is a way to organize your enterprise and can vary between a sole proprietorship and a massive multinational.

More precisely, is a way to dictate who you should register as a company owner. Besides, it is also a way to decide who is responsible for your business’s legal liability and how your workers can be taxed. There are four types of business structures, but today we will focus on sole proprietorship vs LLC.

2. What is a sole proprietorship?

A sole proprietorship partnership is the most common company structure. It is a business with no distinction between the owner and all debts or liabilities. Most owners know that sole proprietorship taxes are simple.

They are easy to establish, have few legal formalities, and provide their owners complete control over all decision-making. If you are a contractor or you own a small company in Dubai, you are likely to operate and face minimum taxes. With that in mind, you need to know some key aspects of a sole proprietorship.

2.1 You have more freedom

Sole proprietorships allow complete control over the operations of your business. This can be an advantage for those who want to be able to make decisions without having to consult others, especially when it comes to sole proprietorship taxes.

2.2 Less paperwork

It is one of the most important advantages of this business. At the same time, it is good to be aware that there are many other aspects that you should consider before choosing this type of entity.

On the other hand, you may need to get a business license or permit, depending on the regulations of your state or local government. However, one of the benefits of starting a company as a sole proprietor is that it allows you to grow your enterprise much more easily and with fewer troubles.

2.3 You do not need a lot of money to start

Starting a sole proprietorship is relatively easy and inexpensive if we compare sole proprietorship vs LLC taxes. And do not require formal registration with any government agency. To start your business, this type of ownership could work out well for you.

2.4 Uncomplicated taxes

A difference between sole proprietorship vs. LLC taxes is that losses are transferred to your tax bills. In other words, your taxes can deduct losses incurred during a year.

2.5 Simple banking

Knowing the advantages of sole proprietorships or LLC taxes is a key aspect of owning a sole proprietorship. One of the best things about this kind of business structure is that you do not need a business checking account to operate your company.

You can theoretically run an LLC without a business checking account, but this will take away most of the personal-finance protections that come with having one. Running a business while being to know the differences between sole proprietorship vs. LLC taxes offers flexibility. You can accept payments right from your bank account, which some companies cannot do.

3. LLC company formation: What is it?

In the United Arab Emirates, a limited liability company (LLC) is a type of company that provides limited liability to its owners. This type of business entity is popular in the UAE and is similar to a corporation in other countries.

An LLC for an online business in the UAE can be established by one or more individuals, and each owner is only liable for the amount of their investment in the company. For example, if your company gets sued, your assets and bank accounts will not be at risk because of the limited liability that it provides.

There are advantages of setting up a limited liability company (LLC) in Dubai. Some of the key benefits include:

3.1 Limited liability

The owners of an LLC company are protected from personal financial liability should the company face legal action or debts. Limited liability is just one of the many reasons why LLC for online business is popular with owners and entrepreneurs.

3.2 Tax benefits

Dubai-based LLCs are exempt from income tax, which can be major cost savings for businesses operating in the Emirate. The government is also reducing the land rental rates, corporate tax rates, and corporate fee rates insole proprietorship vs. LLC taxes.

3.3 Easy formation

Setting up an LLC is not as hard or expensive as setting up a sole proprietorship. However, you will still need to file paperwork with the state, but this is usually simpler and for a much lower fee. And of course, you will need a good LLC insurance policy in place too.

4. LLC vs. sole proprietorship: How is the company’s formation?

You might not need to do anything, in particular, to choose between a sole proprietorship vs LLC. You could be operating a sole proprietorship without even realizing it. Anyone who sells products or services without incorporating is automatically one.

For an LLC to exist, it must also file for business permits (if operating under a trading name). Knowing this is important to set up your company for online business, so you cannot skip this step.

4.1 LLC vs. sole proprietorship: Operations and management

Once you decide between sole proprietorship or LLC, the rest is generally straightforward to manage. In other words, you can dictate all of the decisions your business takes without input from anyone else.

The rules of an operating agreement usually dictate an LLC’s operation and management. However, that is not always the case. Maybe you are in a city in the UAE where they do not have to be filed with your state government. Or maybe you are operating as a single-member entity. You need to be informed about the specific needs of your company.

4.2 LLC vs. Sole proprietorship: Taxes

In addition to income taxes, both sole proprietorships and LLCs might have additional tax responsibilities. No matter which business structure you adopt, you will need to pay payroll taxes if you have employees.

You will also need to collect state and local sales taxes to sell taxable goods or services. And finally, as a sole proprietorship self-employed business owner, you are responsible for paying self-employment taxes. These taxes cover up your social security and Medicare tax obligations.

4.3 LLC vs. sole proprietorship: Legal protection

A sole proprietorship business is not legally separate from the person who owns it. It is the business that handles everything—both its successes and failures. Both the sole proprietor’s personal and business debts will be considered when he or she files for bankruptcy.

One of the best strategies to protect your assets is to form an LLC. With an LLC, the owner is not liable for some of the business’s obligations, avoiding any potential future consequences. If your business fails, the owners can apply for bankruptcy, and in most cases, you will not have to pay creditors themselves.

4.4 LLC vs. sole proprietorship: Paperwork

The final difference between sole proprietorship vs LLC is that they have different compliance requirements. As we mentioned earlier, a sole proprietorship self-employed has less paperwork to fill with before launch. This makes them a great choice for entrepreneurs who want to establish their business quickly.

An LLC may require more compliance responsibilities than a sole proprietorship, especially when filing annual reports. LLCs have to file annual reports in many states. If you are part of an LLC with multiple members, you should be aware of the many responsibilities like issuing membership units and holding annual meetings.

5. Can you convert a sole proprietorship to an LLC?

When should a sole proprietor become an LLC? The process is not that difficult: you will need to file articles of organization with your state and create an operating agreement. You will also need to delegate a registered agent and create a business bank account.

It is important to note that there may be some tax implications associated with the conversion, so it is best to look up a consult with a professional accountant or tax specialist.

6. How to make the decision: LLC vs. sole proprietorship?

The best business structure for your company always will depend on many factors, and it is best to look for the assistance of a business lawyer.

It is always necessary to look for professional assistance before making these important decisions. However, due to liability protection and tax flexibility, an LLC is often a great fit for a small business owner.

7. How much ownership control over your company do you want?

Think about how much control you want. Do you want to make all of the decisions and operate by yourself, or are you open to giving up some control to get a larger reach?

If you want to run your business yourself, a sole proprietorship partnership or LLC are your best options. All the others only apply if you will share control over your business.

8. Managing liability and risk

Think really carefully about whether you are willing to risk everything for the business. Some small business structures can leave you personally liable for any losses the company suffers, even if that means using your savings or equity.

If you are not willing to take that kind of gamble, forming an LLC (usually the best choice for small businesses) or a corporate entity may work better for your situation. In every case, you always need professional assistance.

9. How long do you want your company to last?

There are a variety of business structures, and some can last long after the original business owner stops working. If you cease operating your business, it will automatically terminate. The sole proprietorship partnership cannot be passed on unless there are provisions for its continuation.

If you are the only person in the LLC partnership, the situation is largely the same. If you pass away or stop operating the business without filing paperwork to transfer the business, your partnership will dissolve.

10. How can we help you learn more?

The best way to find out what type of business you need is to communicate with professionals who can help you. At Connect Middle East, we are a legal advisory team that can answer all your questions.

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Would you like to contact us to learn more? If you have any doubts about this or any other topic, please send us an email (contact@c-uae.com). One of our representatives will send you a response shortly.

Harneet Bhatia

Harneet Bhatia is the Sales and Compliance Officer at Connect Group. She is specialized in Company Setup Services , golden visa uae , Business Consultancy and Sales Assistance. She is working within Middle East and UAE. Also she has done her Master of Business Administration in Literature.

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