LLC vs. Sole Proprietorship

So you are just getting a side business started and you wonder whether you ought to set up an LLC or just operate as a sole proprietor.  A simple Google search can give you all the information you need to know in terms of the pros and cons of establishing an LLC. In fact,  Fit Small Business put together a nice table with 5 pros and 5 cons of utilizing an LLC for your business.  I am going to share those with you, and then jump into some different examples and whether you ought to set up an LLC or just stick with a sole prop. First, some pros and cons:

Here are a number of examples and scenarios that tell you whether we would suggest an LLC or a Sole Prop in each situation and why. This will help you understand the basic principles that help determine when an LLC is appropriate vs when a sole proprietorship might make the most sense. 

Scenario 1 - I am already selling products and/or services, I have customers and expect to have customers in the future. 

  1. Recommendation - LLC
  2. Justification - An LLC has a number of advantages over operating as a sole prop, so if you believe that you will be in business long term you might as well just move forward with creating an LLC.

Scenario 2 - I made myself a dining room table and one friend asked me to make the same table for her house and paid me to build the table.

  1. Recommendation - Sole Proprietorship
  2. Justification - If you are just planning one project for a friend, then there is no reason to go through the hassle of setting up an LLC. 

Scenario 3 - I am hoping this is a business for the foreseeable future and want to see it grow over time. 

  1. Recommendation - LLC
  2. Justification - Again, eventually you will want to be an LLC most likely, so if you expect the business to still be active in a couple of years, you might as well just get the LLC set up.

Scenario 4 - I have large sale transactions over $1,000 per sale. 

  1. Recommendation - LLC
  2. Justification - I would suggest an LLC at this point because the larger the transaction the more likely it seems for you to have a customer dispute or lawsuit in which case you will want to have an LLC to provide some personal liability protection.

Scenario 5 - I am selling to businesses, not individuals. 

  1. Recommendation - LLC
  2. Justification - If you are selling to other businesses I would suggest that you set up an LLC.  If you are trying to appear professional to your business customers, having an LLC will look more professional and serious than operating as a sole prop.

Scenario 6 - I do random labor or projects that are always small and different. 

  1. Recommendation - Sole Prop
  2. Justification - In this scenario you are really just more of a manual laborer, but you aren’t really building a business per se.  You are just picking up random work as it comes to you.  A sole prop is probably sufficient in this case if you don’t want to go through the hassle of setting up an LLC.

Scenario 7 - I am selling food, or providing advice, or doing some sort of work where I think my customer might end up suing me. 

  1. Recommendation - LLC
  2. Justification - If you are taking family photos for a friend you are probably not too likely to get sued, but if you are in an industry where there could be some risk that you get sued, an LLC could provide some personal liability protection.  It would be worth setting up the LLC for peace of mind.

Hopefully these examples were helpful.  In general, if you are planning for this business to be around for the long term and believe that you will generate sales on a regular basis, then an LLC is probably worth the effort. If you have any questions about your unique situation or if you have questions on how to set up your LLC please don’t hesitate to reach out to us. 

Here at Side Hustle University we serve as a course guide that is focused on encouraging you to create your own side hustle. We are committed to giving you the best opportunity to identify, shape, and build your business from the ground up. We encourage you to check out our website to learn more about how you can become the side hustler you've always wanted to!