Recently, we’ve received some questions about sole proprietorship.
While in the past we’ve talked about LLCs and S-Corps, we glossed right over the option to form a Sole Proprietorship.
Most private practice nutrition professionals we have met will file their practice as an LLC and for most individuals in private practice, it is our recommended option when setting up your business though every practice is different and has different goals. Today, we’re going to discuss the differences between an LLC and a Sole Proprietorship to help you decide which way you would like to file.
The biggest difference between an LLC and a Sole Proprietorship is your relationship to your business as the business owner.
What is an LLC?
An LLC separates your business from yourself. It declares that your company is its own entity. It means that you are not personally liable for your business in that your personal assets are protected and separate from your company.
An LLC is a formal organization and does require filing with a state. It may be expensive to start because of this upfront cost.
However, with an LLC, there is an added layer of liability protection.
Beyond having liability insurance, if you were to be sued, the law suit would be against your business and not you as an individual.
What is a Sole Proprietorship?
As opposed to an LLC, a sole proprietorship declares that you are a business owner. In other words, your business is not separate from yourself.
It does not have the same upfront cost and is a simpler process than filing for an LLC. It is significantly cheaper to file as a sole proprietorship.
While you can keep your business financials separate from your personal assets, there is no legislation prohibiting financial intermingling with a sole proprietorship.
The major disadvantage to a sole proprietorship is that you would not be protected against personal liability.
If you were to face a law suit, the suit would be against you and puts your personal assets at risk. While liability insurance can offer some protection, be sure that you stay aware of the boundaries and limits of coverage.
Choosing a Name for Your New Business
When registering your business as a sole proprietorship, your business will be linked to your legal name.
For an LLC, you’ll be able to choose a business name of your desire, given that it meets the naming requirements and regulations as indicated by your state. Many states have a list of “restricted” words that you cannot include within your LLC name. It’s also essential that you do a proper check to ensure no other business in your state is legally operating under the same (or similar) name.
To check if your proposed business name is already in use, you can:
- Check the telephone listings in the areas your business will operate for similar names.
- Check with the county clerk’s office of the counties in which your business will operate for similar names.
- Check business directories, city directories, chamber of commerce lists, internet, etc. for similar names.
- Review trademarks and service marks on file with U.S. Patent and Trademark Office.
- Search the filing offices of other states for similar names. The appropriate office may vary according to the laws of each state.
Filing Your Business as a Legal Entity
Forming a sole proprietorship requires very little legal work, in fact there is no formal filing system unlike an LLC. With a sole proprietorship, you can obtain an EIN (tax ID number) in just 10 minutes online, which will then allow you to open up a separate bank account for your business.
To form an LLC, you’ll need to visit your State Government website, which will likely have an online filing system. You’ll be prompted to:
- Propose a business name (Note: you may need to include LLC within the name for it to be approved, please read your State regulations carefully)
- Use the online filing system to check-off and indicate some important information, like how many members your LLC will include, county your business is located in, LLC organizer name and address, etc.
- Once all information is filled out on your form, you’ll be prompted to pay the filing fee, which can vary depending on your state. Typically the fee ranges from $100-$800, plus any additional fees if you prefer to be sent a certified copy.
You can file your LLC online independently, or go through a business attorney. Many nutrition providers choose the convenience and affordability of using an online legal system to file their LLC such as LegalZoom.
Setting up your wellness business as a legal entity is an important, and defining step. Choose the business structure that will best benefit your practice in the long-run, by understanding the pros and cons associated with each legal structure. Although you can go through the motions and establish your business independently, consulting with a business attorney can best help you understand the finer points of your business.