There are a lot of important decisions to make if you want to start an online boutique in 2023. One of the most important is what type of business entity you should choose. Should your online boutique be a sole proprietorship or an LLC? This is a big decision that has pros and cons. So it’s important to understand the difference between the most common options before making a choice.
So in this blog post, we will discuss the benefits and drawbacks of both a sole proprietorship and an LLC. And give you the information you need to make the best choice for your online boutique!
What Is a Sole Proprietorship?
A sole proprietorship is the simplest type of legal business entity you can form in 2023. There’s no need to file any paperwork with your state, and you can start operating as a sole proprietor as soon as you get your online boutique up and running.
The biggest advantage of being a sole proprietor is that you have complete control over your business. You’re the boss, and you can make all the decisions about how your online boutique is run. There aren’t any formal guidelines to follow.
But that can be an issue because there is no true structure to a sole proprietorship—more on that in a bit.
Now the biggest disadvantage of being a sole proprietor is that you’re personally liable for any debts and liabilities incurred by your business. This means that if your online boutique ever goes into debt or (an unfortunate reality) gets sued, your personal assets are at risk. And may be used to cover those arrears or lawsuit costs.
That’s something really important to consider when weighing your options.
Another downside of a sole proprietorship is that it can be difficult to raise money from investors.
A sole proprietorship has way less structure than other business entities. There are no strict rules on how the business is run or records are kept. Which makes a sole proprietorship less attractive to potential investors or loans. Everything is based on your personal credit, business savvy, and money management skills. And you essentially act as the personal guarantor for any business-related purchases you might make to grow. That can include using credit cards to fund your inventory or hiring your first assistant. Thismuc means that if you default at any point, your personal credit (and assets) may be at risk.
So if you’re looking for outside funding to grow your online boutique (or want to be able to access it in the future), a sole proprietorship might not be the best option.
What Is an LLC?
A Limited Liability Corporation or LLC (when you click this link, we earn a commission at no cost to you 😉 which helps us to continue creating new content every week so that you can start and grow your online boutique) is a type of business entity that offers some of the same benefits as a traditional corporation, but with less paperwork and fewer formal requirements.
Unlike a sole proprietorship (and as the name suggests) an LLC offers liability protection to its owner(s). So your personal assets will be protected if your business ever gets sued or goes into debt.
Having an LLC also makes you eligible to access things like business credit or business loans because you’ll have a more formal business entity. So make sure you start building a credit profile that can be completely detached from your personal credit history. That will create opportunities to grow much faster.
And an LLC comes with tax advantages such as being able to claim reasonable business-related expenses as deductions from your overall tax bill.
Of course, there are some disadvantages to setting up an LLC. An LLC is more expensive than a sole proprietorship. You’ll need to file the necessary paperwork with your state, create things like operating agreements and pay annual fees. Get help with all that paperwork when you use IncFile (it’s much cheaper than LegalZoom 🙌)
You’ll also need to follow certain requirements, such as holding regular meetings and keeping minutes for those meetings.
Choosing A Business Entity For Your Online Boutique
So which is better for an online boutique? A sole proprietorship or an LLC?
There’s no easy answer to this question. It depends on a number of factors. These include your personal risk tolerance, getting access to outside funding, and any long-term plans for your online boutique. That means protecting yourself and your business would be an important consideration.
So even if you’re just starting out, we’d always recommend setting yourself up for success in the long term. When starting a business, investing in it is mandatory, not an option. So avoiding setting up an LLC likely means that you’re not fully ready to start an online boutique.
But if you have a plan for how you will successfully launch and grow your boutique, then paying for an LLC shouldn’t be something that gets in your way.
To get your LLC, you can use a trusted company like Inc File to really make the process seamless.
Click here to create your LLC.
Click here to get your EIN or Employee Identification Number.