New York and New Jersey laws provide a wide range of options regarding the organization and structure of businesses, with recognition that the needs of a small, one- or two-person operation are likely to be substantially different from those of a much larger business. Businesses with no formalized legal structure are known as sole proprietorships if they have only one owner, and general partnerships if they have two or more. An informal business structure works for many business owners, but the business entities defined by state law have certain benefits that everyone should consider. Converting a business from a sole proprietorship to a limited liability company (LLC) can be an effective way for a business owner to protect both the business and themselves.
Sole Proprietorship vs. LLC
Operating a business as a sole proprietorship may offer some advantages:
- Simplicity: There is no need to file any specific paperwork with the state to maintain the business, aside from an assumed business name, also known as a "DBA."
- Only one tax return: A sole proprietorship, unlike a corporation, does not file its own tax return. The business owner includes business income and expenses in a schedule attached to his or her personal return.
These possible advantages, however, come with some distinct disadvantages:
- The owner of a sole proprietorship is personally liable for any and all business debts.
- Similarly, business assets are susceptible to claims against the owner as an individual.
- A sole proprietor must keep meticulous records distinguishing personal and business assets, debts, and expenses.