The biggest difference deals with personal liability. A sole proprietorship is the simplest business entity out there. A business owner conducts business then the taxes “pass-through” to the business owner for income tax purposes. Although it’s nice not to have any formalities to keep up with, a sole proprietorship provides its owner with no personal liability protection. That’s why many individuals will form a limited liability company (LLC). Forming an LLC requires you to register with your given state and complete a few annual formalities, but it also protects you from personal liability. That means a customer who gets hurt from your product or inside your store cannot reach your personal assets, assuming you comply with the rules governing an LLC. Like a sole proprietorship, an LLC is a “pass-through” entity when it comes to taxes as well.
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