Sole Proprietorship Vs Independent Contractor Vs LLC - What Is The Best?
Sole Proprietorship Vs Independent Contractor Vs LLC - What Is The Best?
When your company is at the startup, and everything of your business is in the initial stages, you have chosen how you will operate the business. As a newbie in the business, it feels hard to understand the difference between sole proprietorship, independent contractor, or LLC.
So you want to
know about the difference in taxation structure, operation management, the
guide of sole
proprietorship vs independent contractor we have made only made for you.
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What Is Sole Proprietorship?
Before we go to
the sole proprietorship vs independent contractor, you should know about the
terms of a sole proprietorship, independent contractor, and LLC. A name sole
proprietor indicates that it is a single-handed business. You do not need any
team or persons to do any business.
However, you have the authority to hire as many people as you want for the business’s smooth operations. In a sole proprietorship, the business owner is liable for every act of doing of a company. This type of business is easy and no implication on business matters.
The beginning
of every business is a sole proprietorship. You do not need to register the
business as it is a default business term.
Can a sole
proprietor have independent contractors?
This is the
most frequently asked question. The answer is yes. A sole proprietor can. A
sole proprietor has the authority to hire employees to operate the business.
And he can have an independent contractor to assign the task.
Independent Contractor
It is the second term in sole proprietorship vs independent contractor where the business owner makes contracts with the clients and offers the services. Once the contract is fulfilled, there will be no obligations between the two.
The other name
of the independent contractor is 1099. Because whenever an independent
contractor makes contracts with companies and people worth above $600, the need
to furnish a form 1099. This form indicates the earning received from the
client. The purpose of this form is to levy the taxes at the end of the year.
What Is An LLC?
An LLC is a
limited liability company. It is like a separate legal business entity that is
registered through a proper procedure. An LLC can own, operate the business in
its name. It can make contracts, can sue, or be sued. So you can say that LLC
works like a living human that has its name and ownerships.
Llc is a
suitable mode of business if you need business protection and litigations.
Everything is the responsibility of the company, and you can work as the
founder of the company. The formation of an LLC is widespread in the US.
Sole Proprietorship vs Independent Contractor
Both of these terms are different from each other. But the thing that differentiates the most is taxation. Let’s find out the differences.
Taxation Difference
When you see the comparison between the two terms, there is a vast difference in the taxation field. A sole proprietor is liable to pay tax as personal income tax. Everything he earns in the business is liable to pay income tax only. There is a need to submit the tax returns at the end of the year, and the government levy taxes on the income that he earns throughout the year.
On the other
hand, an independent contractor is liable to submit the form 1099 if he makes
contracts of $600 or more. A contractor has to pay taxes as income and payroll simultaneously,
which makes him liable to pay more taxes than a sole proprietorship.
Liability Limitations
There are differences from the liability perspective when we analyze between sole proprietorship vs independent contractor. A sole proprietor is personally liable for all the losses that a business bear. If there are circumstances when a business goes in a significant loss or any legal litigation, the sole proprietor is liable for that. He or she has to sell the property to pay the debts. So, the liability is unlimited in this business mode.
When we see the
independent contractor, the element of liability is not as strict. The
liability is limited to the contract that he makes. If the contract expires,
the contractor is not further liable for anything. The difference is minor;
however, the independent contractor has the upper hand in sole proprietorship
vs independent contractor SBA.
Sole Proprietorship Vs LLC (Limited Liability Company)
Now it's time to clear all your doubts through the comparison between sole proprietorship and LLC. As a previous comparison of sole proprietorship vs independent contractor, the difference was not that much. But sole proprietorship vs LLC has enormous differences.
Liability In Sole Proprietorship Vs LLC
We have
mentioned above that a sole proprietor is personally liable to all things
losses or litigation cases. But an LLC can shift that liability from its
founder. The founder of an LLC is not personally liable for anything but what
he has invested in the company. This element makes LLC so much popular that
everyone prefers to start a business as an LLC.
The company can
handle all the litigation, losses, and matters and makes the founders out of
these problems.
Taxations
Good things come with some compromises. On the one hand, LLC is protected by limited liability, but on the other hand, the taxation is heavier than a sole proprietor or independent contractor. A company has to pay taxes on the earnings, employees, and sales or withholding taxes too. So the sole proprietorship is very good in the matters of taxation. It only needs to pay income tax annually.
Insurance Protection
There are no insurance plans for the sole proprietorship, and if a sole proprietor wants to get his or her business insured, he will have to do it separately. Contrary to that, an LLC can ensure the business by different insurance plans. These plans give the founder mental satisfaction that their business is secure in bad times.
These are the
main difference between these business terms, but you can contact us if you
need any further guidance.
