October 25, 2014

LLCs are a Hot New Trend Among Sole Proprietors

llcs are a new trend

Unless you are an accountant specializing in small business, you may not be aware of a new trend in the world of sole proprietorships: registering with the Internal Revenue Service (IRS) as a limited liability company (LLC). While LLCs have been around since 1977, their popularity among sole proprietors has accelerated in the past decade, data from the IRS reveals.

The figure above shows the fraction of sole proprietorships organized as LLCs along with their share of the revenues of all Schedule C filers from 2001, when the IRS first began to provide these data, and 2011, the most recent year for which these numbers are available.

As you can see from the figure, in 2001, only 126,437 non-farm sole proprietorships, or 0.7 percent of the total, were registered as LLCs. But by 2011, the number set up this way had grown to 1,125,132, or 4.8 percent of all non-farm sole proprietorships.

The sole proprietorships organized as LLCs are larger, on average, than other proprietorships. In 2011, Schedule C filers organized as LLCs accounted for $244 billion of sole proprietors’ revenue, or 19.3 percent of the total. In the same year, the net income of LLC sole proprietors was $27.1 billion, or 9.6 percent of sole proprietorship total.

Moreover, the pace of LLC proprietorships’ income and revenue growth has been greater than their increase in numbers over the past decade. Between 2001 and 2001 the revenues of LLC proprietorships went up nearly ten-and-a-half-fold increase, their income rose twelve-fold, and their numbers increased nine-fold, IRS data show.

Why the Popularity of LLCs Among Sole Proprietors?

In a word, it’s liability.

LLCs provide the liability protection of a corporation, but with less paperwork and record keeping.

That’s attractive to sole proprietors. With an LLC structure, the owner’s business liabilities are limited to the assets owned by the LLC. But income from a single member’s LLC is still recorded on Schedule C of the owner’s tax return where a sole proprietor would ordinarily report his or her income.

Image Source: Created from data from the IRS Statistics of Income

8 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

8 Reactions

  1. It may be popular, but it may also be futile. I am not a lawyer, but when I researched this, legal opinions suggested, and it varies state to state, that a single member LLC, or a dual member partnership between married partners may not be recognized as a proper LLC in a lawsuit.

  2. I’m one of those statistics and the reasoning is right on, limiting my personal liability without so much paperwork hassle.

  3. We’ve done several studies on why solopreneurs and micro businesses incorporate. Liability is certainly a key reason and the main reason accountants and lawyers provide when they suggest to small businesses that they incorporate. This despite, as Chris points out, the fact that LLCs have not proven to be effective at shielding personal assets from lawsuits in most states.

    Other reasons to incorporate include a belief being a corporation makes a business look more professional, customers requiring incorporation to avoid employee misclassification issues and greater flexibility around tax deductions.

    But one of the main reasons for the growth of LLCs is they are so much cheaper and easier to set up than in the past. When I incorporated my business a decade or so ago it cost several thousand dollars and took quite a bit of time as well as multiple meetings with my attorney. Today you can do it easily and quickly online for a couple hundred dollars.

    Because of this, we often hear in our research “it only costs a couple of hundred bucks, so I did it.”

  4. It may be popular but still more research needed to prove it resulted in profits.

  5. I work with a number of small businesses and recommend on a regular basis that if they are a sole proprietor they consider being in a LLC to at least have a layer of liability, as well as for branding purposes when putting out their business information. It’s easy to get a DBA, although it doesn’t give any protection and anyone can virtually use it. In fact I don’t even charge for completing the form because it takes all of 5 minutes, which they appreciate.

  6. LLCs are not bullet proof, but nothing is. Many small business have the erroneous belief that they are protected from a suit even when the sole owner is also the sole employee, or the principal employee in a very small firm. Individuals can be sued based on work that they personally performed; there is no way to get around this. A lot of the beliefs out there about LLC as protection against liability are folklore and wishful thinking. LLCs have not been tested in court to nearly the degree that corporations have been, and to the extent there is a trend in the cases, it is that LLC’s will, AT BEST, be treated like corporations for purposes of liability. Forming an LLC is cheaper. The big dogs structure themselves, whether as LLCs or coporations, with a maze of related companies, subsidiaries, and parent companies, trying to have a separate entity for every separate risk. It can be very difficult to identify the responsible entity as a result.

    If you want protection, get more liability insurance and get insurance that is specific to your line of business; many types of business activities are excluded from coverage in a general liability policy (for example, employment discrimination claims, intellectual property, hazardous businesses, environmental claims) You need to be covered for what you are, in fact, doing, not for “general business.” Small businesses are particularly prone to having too little, or the wrong types, of liability coverage, believing it is all wasted money. One lawsuit will change your mind forever, if your business survives it.

  7. This is an informative post. I want to share this site PDFFiller which I find very useful in filling out IRS forms. It help me fill out my Schedule C tax form easily and allows me to print, save, email, fax, share, send to sign or even add pictures. Here is a link to blank Form 1040 Schedule C http://goo.gl/CTdxDH just in case you need to fill out one.

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