If you’re running a business of any kind, including your marketing or web business, you’ll need to pay some taxes. Declaring your business as either a sole proprietorship or a Limited Liability Company (LLC) dictates how you’ll pay those taxes and facilitate changes in the business as you grow, such as the addition of employees.
While a sole proprietorship is simpler to set up, an LLC may benefit your marketing business in the long run. We’ll explain the differences between the two entities below and help you decide which is right for your business.
Setting up your entity
No doubt about it, setting up a marketing or web business as a sole proprietorship is the easier choice. In fact, if you’ve already received payments for your work from clients, you’ve been trading as a sole proprietor without even knowing it.
A sole proprietorship is the simplest and least expensive type of business to own. It is unincorporated and has one owner (you). Often the owner’s name is the business name, though you can apply to trade as a sole proprietorship under a different business name by receiving a DBA (doing business as) certificate. Certain types of companies, such as retail, may also need to apply for a permit due to their city’s zoning laws. However, you are probably exempt from this detail as a marketing or web development business.
Forming an LLC is also straightforward but requires slightly more paperwork. You may still need to file for work permits and receive a DBA, but the main difference is that you must file articles of incorporation to establish your company’s existence. These are filed with the state in which you are operating. The associated fee varies from state to state but is usually between $50 and $100.
Structure and management
As a sole proprietor, you’re alone at the top. You alone are entitled to make business decisions. While you can hire employees, accountants, or freelancers, your responsibility to the company is straightforward: make sure all business expenses are covered.
In an LLC, you may have more than one business owner, and their roles and responsibilities are outlined in the operating agreement. In this document, ownership percentages are explicitly stated, and shares of profits are outlined.
In an LLC, you are legally required to keep your business expenses separate from your personal ones. In a sole proprietorship, this is not required (but it’s still a good idea to set up a separate checking account to keep expenses separate for more accurate filing at tax time).
In other states, LLCs and sole proprietorships often pay their taxes as pass-through taxation, which means that the business entity doesn’t pay taxes. Instead, business owners pay taxes and personal income tax.
In Texas, we have no personal income tax, so business owners whose receipts for the year are below a certain threshold may pay no tax at all. However, as your business grows and your profits increase, even sole proprietors will need to pay a “franchise tax” on their business profits. For the tax year 202, that threshold was $1,880.
One of the main advantages of an LLC is that as your marketing business grows, you can choose how you want to be taxed to maximize tax savings for your business. As an LLC, you can choose to change your tax status to an S Corporation or a C Corporation, separate designations which offer unique tax benefits and can save your business a lot of money with the help of a savvy accountant.
The potential tax savings associated with running your marketing or web business as an LLC are substantial, but choosing “LLC” also offers another significant advantage: the protection of your personal wealth.
Imagine you incur operational debts or are unfortunate enough to be sued for damages or compensation. In that case, trading as a sole proprietor leaves your personal wealth wide open to be claimed as payment for those debts.
However, working as an LLC means that no matter what debts you may incur as you operate your business, your personal money, investments, and real estate cannot be seized as payment for those debts. An LLC may involve a little more paperwork, but it offers far more protection to the business owner.
So which is right for you?
Ultimately, deciding on an LLC or a sole proprietorship should be based on your plans for your company. If you intend to remain a lone web/marketing wolf, consulting on a contractual basis only, operating as a sole proprietor is the right choice.
But if you have big dreams for starting a marketing or web agency, for building your startup into a thriving business, establishing an LLC gives you room to grow. With an LLC, you have the flexibility to change your tax status while simultaneously protecting your personal assets. Plus, you can avail of more business credit from banks as an LLC.
We’re here to make establishing your LLC a breeze. What’s more, we’re your team for identifying how best to file your LLC’s taxes to guarantee you receive the full advantage of available tax breaks and incentives.
Contact us today at any of our three Metroplex locations to get us working on your LLC paperwork.