What Is The Difference Between A Single Member LLC And A Sole Proprietorship?

If you are looking to start a real estate investing business, you should be familiar with two popular business structures at your disposal. 

These are Single Member Limited Liability Companies (SMLLC) and Sole Proprietorships.

Both options can help you get your business off the ground, but it is worth considering the protections and future commercial growth you can achieve with each. Sole Proprietorships offer simplicity and ease of creation, and an SMLLC is advantageous if you are looking for a legal limitation of liability and the flexibility to change tax status as you grow.

Starting a Business: Giving Structure To Your Idea

Though it may begin with an idea, the successful establishment of a profitable business requires a suitable legal framework for hiring employees, purchasing capital, and saving money all while keeping the taxman happy. In this regard, many legal entities (including both a Sole Proprietorship and an SMLLC) are able to perform these basic functions and the difference comes in the advantages each provides.

What Is a Sole Proprietorship?

Put in the simplest of terms, a Sole Proprietorship is when you yourself take on the responsibilities and benefits of running a business. While you can use your own name, it is better to take on a trade name. Forming an LLC can be done by filing the name with the clerk in your county for a nominal fee.

Depending on the type of business you intend to run, you will need to acquire the necessary licenses and permits. If you wish to hire employees you will need an Employer Identification Number as well. All of these may come with certain fees but nevertheless the whole process is easily the cheapest method of setting up a business.

In addition to its low cost, there are certain tax advantages afforded to a Sole Proprietorship, (this will be expanded on later) and this, combined with its simple set up process, makes it an attractive option.

What Is a Single Member Limited Liability Company (SMLLC)?

In Texas, it is permitted to establish a Limited Liability Company (LLC) with a single owner (referred to as a ‘member’). Although there are many types of LLCs, they all have the benefit of limiting liability for their members. Of course, this is a huge advantage as you will not be at risk for the LLC’s debts and conversely, the LLC will also not be liable for your personal liabilities.

Since it is a sort of hybrid between partnerships and corporations, LLCs have a certain relaxed level of formality when compared with traditional corporations. This is ideal for smaller business operations who want a streamlined process while also getting the perception of credibility that comes with being a company.

Setting up your SMLLC will be a bit more of an involved process than a Sole Proprietorship. You will need to file Articles of Organization for your new LLC with the state and then draft an Operating Agreement to ensure the maximum possible benefits are made available.

Shared Benefits Between Between A Single Member LLC And A Sole Proprietorship

While both a Sole Proprietorship and a single member LLC are subject to a self-employment tax, overall the tax burden can be reduced by taking advantage of pass-through taxation. In short, pass-through taxation is when the profits pass through the business, in this case, either a Sole Proprietorship or a SMLLC, and is taxed as part of your personal income tax return. Since you can deduct expenses including up to half of the self employment tax, you can greatly reduce the amount of tax you need to pay.

Additional Advantages of The Single-Member LLC

As expected given its popularity, the SMLLC does afford some additional benefits over the Sole Proprietorship model. For many, the limited liability provided by an SMLLC is the most attractive feature as it allows for separation between personal affairs and those of the LLC. For this reason, although not required, having an Operations Agreement for your SMLLC will effectively separate your affairs from those of the LLC.

Furthermore, an LLC has further tax flexibility as it can opt to be taxed as a Sole Proprietorship (as explained above), as a partnership or as a corporation. As your business grows, having these options is of great benefit to make your tax burden as efficient as possible.

For enterprising individuals, trading as a Sole Proprietorship or using an SMLLC are attractive options due to the pass through tax feature. While they differ in the legal protections offered, the creation process, and the level of tax flexibility, it is worthwhile to consider seeking competent advice to determine which one is right for you.


Last Updated: 
October 29, 2020

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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