Unincorporated businesses are sole proprietorships and partnerships. These include businesses owned by one or more individuals. Each partner can make decisions and share profits. They’re liable for debts and must pay income tax on earnings.
LLC vs. Unincorporated Business
What is the difference between an LLC and an unincorporated business?
- An LLC is separate from its owners, who are not liable for debts.
- A sole proprietorship, owned by one person, offers no separation between business and personal liabilities.
- LLC members are not personally responsible for debts.
- LLCs are formed at the state level and can have multiple owners.
- To avoid personal liability, LLC finances must be kept separate.
- State regulations dictate LLC naming and operation.
Unlike LLCs, sole proprietors may operate under their own names or register a DBA in their home state for a different business name. Both LLCs and sole proprietorships benefit from pass-through taxation but have different tax filing requirements. Forming an LLC requires filing specific organizational documents, while no formal action is needed for a sole proprietorship aside from licensing and permits.
Example and Pros & Cons of Unincorporated Entities
What is an example of unincorporated entities?
Examples include Limited Partnerships (LP), Limited Liability Partnerships (LLP), and Limited Liability Companies (LLC).
What are the advantages of an unincorporated business?
- It’s easy and inexpensive to start and run.
- The owner, however, is fully liable for any debts.
What are the disadvantages of an unincorporated business?
- Sole proprietorships face less protection and higher personal liability.
- They lack formal benefits, making it harder to secure funding and survive business downturns.
- Sole proprietors pay all their own social security taxes and often lack business insurance.
- They can’t raise capital through ownership interests like corporations with boards of directors.