LLC vs
Sole Prop.
The Executive Verdict
"Do not incorporate until you have Revenue or a Co-Founder. Sole Proprietorship is the Default State ($0). Use it for Validation. LLC is a Legal Shield. Use it for Scale ($1,000+ Revenue)."
2. The Tale of the Tape
To choice correctly, you must understand what you are actually buying when you pay the filing fee.
| Metric | Sole Proprietorship | LLC (Single Member) |
|---|---|---|
| Cost to Start | $0 (Automatic) | $50 - $800 (State Dependent) |
| Liability | Unlimited (House at risk) | Limited (Business assets only) |
| Taxes | Pass-Through (Schedule C) | Pass-Through (Unless S-Corp) |
| Credibility | Low ("John Doe") | High ("Exeluma Tech LLC") |
| Banking | Personal (Commingled) | Business (Separate EIN) |
3. Piercing the Corporate Veil
Founders think an LLC is a magic forcefield. It is not. If a judge decides your LLC is just an "Alter Ego" of you, they will pierce the veil and seize your personal assets.
The 3 Deadly Sins (How to destroy your shield):
- Commingling Funds: Buying groceries with the business card. Fix: Dedicated Business Bank Account.
- Undercapitalization: Starting with $0, making it impossible to pay debts.
- Bad Signatures: Signing as "John Doe" instead of "John Doe, CEO of [LLC]". Always sign as an Agent.
4. The S-Corp Tax Hack
The Math
Sole Prop/LLC: You pay 15.3% Self-Employment Tax on 100% of profit.
S-Corp: You split profit into Salary (W2) and Dividends. You only pay SE Tax on Salary.
Example: $100k Profit
Sole Prop Tax: $15,300.
S-Corp Tax: $9,180. (Salary $60k + Div $40k).
Savings: $6,120 / year.
Rule: Do not switch until ~$60k profit (to cover payroll software costs).
5. The Formation Protocol
Do not rely on feelings. Use these binary triggers.
Trigger A: The Co-Founder (Immediate)
If you have a partner, form an LLC immediately. In a General Partnership, you are liable for your partner's mistakes (e.g. car crash, bad loan).
Trigger B: The Risk Industry (Immediate)
Selling Food, Physical Products, Fintech, or Health? Risk is high. Form LLC Day 1. Buy Insurance.
Trigger C: The $1,000 Validation (Delayed)
For low-risk B2B SaaS/Info: Wait until $1,000 revenue. Use that cash to pay the filing fee. Let the business pay for its own birth.
7. Implementation Guide
Path 1: Bootstrapper
State Website directly.
Cost: Filing Fee Only.
Best for: Local, Single-Member.
Path 2: Scaler
Stripe Atlas.
Cost: $500.
Best for: High Growth SaaS, VCs.
Path 3: Middleman
LegalZoom / ZenBusiness.
Cost: Fee + Markup.
Verdict: Avoid upsells.
The Incinerators
The "Registered Agent" Scam
Using home address = Public Record. Angry customers find you.
Fix: Use a Registered Agent service ($50/yr).
The "Delaware" Default
Living in Florida but forming in Delaware? You pay TWO fees (Foreign Entity).
Rule: Solo = Home State. VC = Delaware.
8. The Connection
Check Your Danger Zone.
The Exeluma "Legal Entity Trigger" analyzes your industry and revenue to tell you if you are Safe (Sole Prop) or Exposed (LLC).