Choice of Entity Issues: Single-Member LLCs vs. ‘Regular’ Sole Proprietorships

Abstract

While the federal and state income taxation of regular sole proprietorships and single member LLCs taxed as sole proprietorships and the taxation of the owners of such businesses is substantially the same, there are a number of tax and non-tax differences that should be taken into account in deciding upon the type of business entity to use for business operations. In the case of small businesses with no employees, there is little difference between the two types of entities except, perhaps, with respect to the treatment of liabilities of the owner and of the business and the state tax treatment of the business in some states. On the other hand, for more complex businesses that have employees and/or are subject to federal excise taxes, the single member LLC is treated as a separate tax entity for reporting, deposit, and payment obligations, whereas the regular sole proprietorship is not. Further, the single member LLC has easier options to change the way in which it is taxed than does the regular sole proprietorship. In summary, this article covers some of the more important tax and non-tax differences between the two types of entities.

Keywords: non-tax, regular sole proprietorship, LLC