At Remitly, we understand that launching a small business is an exciting milestone, but it comes with many important decisions. One early decision involves choosing your business structure: Should you register as a sole proprietorship or a limited liability company (LLC)?
Each option offers different benefits regarding taxes, liability, and flexibility. For instance, sole proprietors retain full profits but carry personal responsibility for debts. LLCs offer personal liability protection, although they are subject to different regulations depending on the state.
In this article, we’ll describe both structures and discuss banking solutions suitable for LLCs and sole proprietorships.
Sole Proprietorship vs. LLC: What’s the Difference?
Sole Proprietorship
A sole proprietorship is owned and operated by a single individual without legal separation between the owner and the business. Profits belong entirely to the owner, but so do any debts or liabilities.
Currently, there are over 800,000 sole proprietorships in the U.S. This structure is typically suitable for lower-risk businesses like freelancers or small-scale entrepreneurs.
Advantages of a Sole Proprietorship:
- Quick, simple setup: Minimal paperwork and lower setup costs compared to other business structures.
- Tax simplicity: Business income is reported on the owner’s personal tax returns.
- Complete control: Owners make all business decisions without the need for partner or shareholder approvals.
- Easy to dissolve or alter: Changes to the business structure or dissolving the business involve minimal legal procedures.
Limited Liability Company (LLC)
A limited liability company (LLC) separates the business entity from the individual owners. It provides liability protection and avoids double taxation through pass-through taxation.
LLCs are highly popular in the U.S., comprising approximately 99.9% of all registered businesses, with about 34.8 million active LLCs.
Advantages of an LLC:
- Liability protection: LLCs protect personal assets from business debts and legal actions.
- Flexible ownership structure: Easily adjustable ownership arrangements accommodate multiple investors and partners.
- Pass-through taxation: Business profits are taxed only once at the owner’s individual tax rate.
- Customizable profit distribution: Members can agree on flexible profit-sharing arrangements.
Banking Solutions for Sole Proprietors and LLCs
What is a Banking Solution?
Most businesses manage their financial activities through business bank accounts, including checking and savings accounts, credit cards, loans, and financial management services.
Whether you’re a sole proprietor or an LLC owner, selecting an appropriate banking solution enhances your business operations and financial clarity.
Comparing Banking Needs of LLCs vs. Sole Proprietors
Choosing a suitable banking option involves understanding your business’s specific financial management needs and convenience requirements.
Benefits of a Separate Business Account
Maintaining a separate business account provides several advantages:
- Financial organization: Keeps personal and business finances separate.
- Professional credibility: Provides business-specific payment methods that enhance professional appearance.
- Business credit opportunities: Helps build relationships with banks to facilitate future credit access.
- Specialized business features: Access to tools like accounting integrations, spend control, and invoicing software.
Ideal Bank Account Features
An ideal banking solution differs slightly between sole proprietors and LLCs:
For sole proprietors, look for:
- Minimal monthly maintenance fees.
- Tools for invoicing and expense tracking.
- Mobile banking access.
- Instant transaction processing.
- No minimum balance requirements.
- Interest-bearing accounts.
For LLCs, prioritize:
- Accounting software integration (e.g., QuickBooks, Xero).
- Higher transaction limits.
- FDIC insurance.
- Low monthly maintenance fees.
- Mobile banking functionality.
- Various credit options.
Popular Business Checking Account Options
Several popular business checking account options frequently chosen by sole proprietors and LLCs include Bluevine, Grasshopper Bank, Relay, Chase, American Express, Wells Fargo, and Mercury. Each offers unique features tailored to different business needs.
Documents Required for Opening a Business Account
For LLCs:
- LLC formation documents.
- IRS-issued Employer Identification Number (EIN).
- Basic business information, including business address and founding details.
For sole proprietors:
- Business name and address.
- Employer Identification Number (EIN) or owner’s Social Security Number (SSN).
- Business license if required by the bank.
Effective Transaction and Payment Management
Efficient transaction management is crucial for small businesses to minimize payment failures and maintain smooth financial operations.
Key components of effective payment management include:
- Accounting and bookkeeping integrations.
- Invoice management and reconciliation features.
- Transaction analytics tools.
- Fraud and risk management tools.
FAQs
Should I register as a sole proprietor or LLC?
Your choice depends on your business goals. Sole proprietorships are simpler and less expensive but lack liability protection. LLCs offer more protection and flexibility, especially as your business grows.
What is the main difference between a sole proprietorship and an LLC?
Sole proprietorships have no legal separation between the owner and business, making the owner personally liable. LLCs provide legal separation, protecting personal assets from business liabilities.
Which business structure is riskier?
Generally, sole proprietorships are riskier because personal assets are directly at stake. LLCs offer liability protection, making them safer for business owners concerned about personal risk exposure.