Sole Proprietorship vs. LLC vs. Corporation

When you form a business, you have a lot of decisions to make regarding its structure. Do you need to worry about liability? What about taxes? Answering these questions are the key to comparing a sole proprietorship versus a limited liability company (LLC) versus a corporation.

Sole proprietorships are typically businesses owned by a single person who is liable for the business and who includes business income in their personal tax return.

Limited liability companies are businesses that separate the owner or owners from the liability but, in the case of non-corporate LLCs, taxes pass through to the owners.

Corporations are entities with tax responsibilities separate from the owners, and profits and losses are not passed through to the owners.

A single owner of an unincorporated business essentially operates the business as an extension of herself. For tax purposes, the profits and losses of the business flow through to the owner’s tax return. In other words, business profits are reported as earned income for the individual owner of the business.