Today, nearly anyone has a smartphone or tab and uses a variety of mobile apps on a daily basis. Educational, entertainment, banking, social media, sports and fitness apps, food, dating, and travel apps, those mobile apps come in numbers to make our lives comfortable and convenient. And there is still an area for invention. 

Are you an app developer thinking of the best legal framework to make this activity your business? We bet you consider a sole proprietorship and a limited liability company. In our overview, you’ll find some quick answers. 

Sole Proprietorship vs LLC: How They Compare

Despite the fact that the digital world is intangible and feels unreal, many people make money in this area. While creating an app is mostly about writing a code and tinkering with it to match certain criteria, it seems that app developers don’t need more than a laptop. In practice, they have a lot more to think of to push their products to the marketplace and make them work. 

You can get enrolled in a marketplace as a sole proprietor or a company. This is when most app developers face the issue of which structure is better for them. 

Obviously enough, a sole proprietorship is an enterprise with a single owner. It’s a so-called unregistered entity that needs no state filing. In fact, it emerges as soon as you start selling something and getting money for that. These entities are automatically named after their owners and are directly associated with them. You are not separate from your venture and are in charge of all the business-related issues. Should any lawsuit occur due to the errors in your app, you’ll be sued individually. 

In the meantime, an LLC is a formal framework that requires state filing to be formed. Once it’s registered, it exists as an independent entity separate from you. Though setting up an LLC does involve some paperwork fuss and is a bit more complex process than opening a sole proprietorship, in case of a lawsuit, it’s the LLC that will be held liable, not you. 

Sole Proprietorship Advantages for App Developers

One of the most popular enterprise forms in the US as of today, a sole proprietorship is widely favored by startuppers, freelancers, first-time businessmen, those who work from home, and owners of smaller private firms. As such, it has quite a few benefits going for it:

• As a sole business owner, you’ll be entitled to all enterprise profits and won’t have to share them with partners;
• There will be no need to fiddle with numerous documents, forms, and applications or observe multiple formalities to open an unregistered firm. This will save you time on filling out the paperwork and money on state fees;
• Being an unregistered entity, it requires no annual report filing, thus, keeping yet another annoying formality at bay;
• Thanks to pass-through taxation principles valid for disregarded entities, you’ll enjoy simplified tax filing. You won’t have to report corporate taxes. The enterprise revenue will transfer to your own tax report and will be taxed under your individual rate;
• As a sole proprietor, you’ll be exposed to self-employment tax which will add to your overall tax burden. On the bright side, though, you’ll get access to special retirement plans and added tax deductions that will enable you to write off certain enterprise-related expenses and compensate for the self-employment tax. 

Beginner app developers often work remotely as freelancers, so a sole proprietorship offers a hassle-free and budget-friendly way to formalize their business. 

LLC Advantages for App Developers

If app development is your major business that generates thousands of dollars, at some point, you might think about opening an LLC to support it. This legal structure is the right choice to catch up with the business growth and ensure some added peace of mind for yourself. The benefits it provides are hard to argue with:

• The biggest draw of an LLC is the liability shield it provides to its owners. Thus, whatever the dispute, lawsuit, or debt your LLC is involved in, your individual funds and property will be intact. It’s the legal entity and its assets that will be held liable;
• An LLC structure boasts flexible taxation that gives it an edge over other business forms. Thus, by default, LLCs are treated as sole proprietorships or general partnerships and are taxed as disregarded entities. Since company revenues and losses pass onto the tax returns of its owners, it allows for avoiding dual taxation. At the same time, you can choose an S-Corp status for your LLC to eliminate a self-employment tax payment and further optimize state charges for a growing business;
• When enrolling in the marketplace as an individual or an unregistered enterprise, your personal name will appear on your seller account. However, if you sign up as a company, your registered name will be displayed making you look more professional to customers and enhancing your business image credibility;
• With an LLC, your capital raising opportunities are much higher. Banks and credit organizations are reluctant to provide equity financing and business loans to non-registered business entities without a clear separation between company assets and those of its owners. 

Is a Sole Proprietorship Similar to a Single-Member LLC?

At a glance, these two enterprise forms might look the same. Both are owned and managed by a single person. Both enjoy disregarded entity taxation, are entitled to hire workers, and withdraw payroll levies. However, these two structures are not the same. 

They are distinguished by liability allocation. With a disregarded entity, you are responsible for the company’s debts, sues, and any other issues. Your individual assets are not protected against enterprise liabilities and can be seized by creditors to indemnify any damages or losses. 

In the meantime, an LLC is an incorporated entity not directly associated with you. Combining the best features of a corporation and a disregarded entity, it brings great tax perks and securely protects your personal funds and property from company liabilities. 

Consult With a Business Advisor

Even though it might seem to you that everything is clear about these two enterprise forms, don’t neglect taking advice from a professional business and tax consultant who can give accurate recommendations taking into account your current situation and future business plans.

Final Thoughts

Both a sole proprietorship and an LLC work fine for app developers. If you are just an amateur and your activity brings no specific risks, an unregistered entity will suffice for your beginner’s needs. Should you engage some partner developers or observe dynamic business growth, it’s better to launch an LLC to optimize taxes and protect your assets and rights.