With so much planning leading up to the day you open the doors of your new interior design firm, it may be tempting to delay making some of the more complex legal decisions that new business owners face.

However, choosing the legal structure of your business can be as important as determining your rates, conveying your design aesthetic and picking what services you will offer. 

We cannot make the decision for you, but we can lessen the burden by providing a basic understanding of the choices available for new interior design business owners, or experienced ones considering making a change to the structure of their business. This guide examines two common types of business entities: an LLC and a Sole Proprietorship. We explain the legal and tax implications of each, highlight the differences between them, and provide additional guidance on how to make an informed choice.

A sole proprietorship is the most basic setup because it views a business owner and their company as one and the same entity. There is no legal distinction between the two. An LLC, or Limited Liability Company, differs from sole proprietorship by erecting a legal barrier between the business and personal entities of a business owner. Since each option brings its own legal, business and tax implications, it is important to pick the one that best fits your type of  interior design business, circumstances, and long term vision for your venture.

Click on a link below to jump straight to the section you’re most interested in:

• What is an Interior Design LLC?
• What is an Interior Design Sole Proprietorship?
• What is the Difference Between an LLC and a Sole Proprietorship?
• Is a Single-Member LLC the same as a Sole Proprietorship for an Interior Design Business?
• When to Switch from an Interior Design Sole Proprietorship to an LLC
• Choosing Between an LLC & Sole Proprietorship

What is an Interior Design LLC?

As its name suggests, a Limited Liability Company provides more shelter if your company goes bankrupt, gets sued or faces mounting debt and is being pursued by creditors. In this scenario, the courts and government view an interior design business separate from the personal finances and assets of the owner. Your property and other personal assets, for example, would be more protected if legal action was taken against the company.  

This provides the same type of liability protection as a corporation in that owners are not held personally responsible for business obligations.  An LLC  is created by filing documents with the state in which your interior design business is located and allows there to be more than one owner - or member - each owning a specific percentage of the company. Learn more about forming a corporation here: Is It Better To Have an LLC or Corporation for Interior Design Business?

What is an Interior Design Sole Proprietorship?

Because a sole proprietorship is the easiest to set up and understand, it is tempting to adopt it right off the bat and move on. Indeed, it can happen by default. The Internal Revenue Service views someone as a sole proprietor as soon as they get paid for their first remodel job even if it is just a small home office redo they did for their cousin. As a sole proprietor, you still must apply for any relevant licenses and permits as required by law, but the government does not recognize the business as a separate entity from your personal assets and liabilities. 

This makes you solely responsible for any assets, profits, and debts. And it also means that you are solely responsible for the liabilities incurred if things go sour with your cousin who successfully sues for damages because the new office shelving installed fell under the weight of its load and landed on his foot. Your assets including your home, vehicle, boat and personal bank accounts can be at risk. Purchasing personal liability insurance can help mitigate that risk.  

What is the Difference Between an LLC and a Sole Proprietorship?

Beyond this major difference in liability protection, here are a few other distinctions to consider when choosing between an LLC versus a sole proprietorship for an interior design business:

• Credibility & Business Credit

While a sole proprietorship offers credibility in the marketplace, especially if you register an official, Doing Business As, trade name, being registered as an LLC in the state you operate in carries more prestige. An LLC provides more credibility and an air of professionalism with clients, employees, and business partners. 

This also impacts drawing business credit, which is often easier to get when operating as an LLC. Lending for sole proprietorships is more likely to be in the form of a personal loan and there may be more limits on the amount you qualify for. Sole proprietors can also find it difficult to secure equity financing, but, as mentioned, this too can be a challenge for LLC businesses since investors are apt to put their funds in corporations. 

• Ease of Formation

Hands down, when it comes to the simplicity of set up, creating a sole proprietorship wins. While you still must acquire any relevant licenses and permits required by law, setting up shop as a sole proprietor demands less paperwork and fewer steps. 

LLC formation is not simple, and requires a greater investment of time, and money. The required paperwork to file as an LLC with the state is more extensive, including items such as articles of organization and an operating agreement. 

• Liability Protection is not Iron-clad

While a sole proprietorship carries more liability risks, the LLC protections are not full proof. There are some circumstances that the creditors can pursue the personal assets of the LLC members. This is especially true if a member engaged in fraudulent activities or blurred the lines between business and personal accounts.  

In either case, acquiring some type of liability insurance is recommended. 

• Tax Implications

A sole proprietorship is the most simple entity to navigate from a tax perspective and can  provide tax benefits. Since both business income and expenses are included in your personal Individual Income Tax Return, any losses can offset income earned from other sources. You will however, as a sole proprietor, need to do additional paperwork throughout the year. Sole proprietors are required to regularly calculate self-employment tax and make quarterly payments to the IRS based on those estimates. 

From a tax perspective, LLCs are a bit of a hybrid between sole ownership and corporations. When an LLC has only one owner it is called a single-member LLC and is  typically taxed in the same way as a sole proprietor, and income earned by an LLC is personally taxable. However, LLC businesses with employees can opt to be taxed as a type of corporation, and therefore become eligible to deduct business expenses from the business income. The laws regarding establishing and maintaining an LLC vary by state, and as always, a lawyer and CPA can help you sort them out.  

Is a Single-Member LLC the same as a Sole Proprietorship for an Interior Design Business?

No. Although for tax purposes, they may be alike, that is where the similarities diverge. A single-member LLC can be formed when there is just one owner and has the same attributes and protections as an LLC with multiple owners or members. 

Is it Better to Have an LLC or a Sole Proprietorship for an Interior Design

Business?

In deciding which entity is right for you and your business, consider which of the advantages and disadvantages resonant most with you and your type of interior design business. 

A survey Houzz conducted in 2022 found that nearly half - 49% - of interior designers started by registering their interior design business as an LLC. Close behind, a total of 35% initially registered their business as a sole proprietorship.

But an LLC is not for everyone, especially if your interior design business is more of a side gig than a full time career commitment. In that case, a sole proprietorship may be a more fitting option.  Operating as an LLC includes requirements that may be too onerous for a part-time business owner. For example, in many states, an LLC must file annual or regular reports.  

Other factors to consider when making the choice between an LLC or sole proprietorship is the size of the business, number of employees and the long term plans for expansion.  Will you be requiring  business loans, or seeking outside investors? How important is gaining the increased credibility that an LLC can bring to your interior design business?

And, of course, consider the time and money resources you have on hand for forming your new company.  

When to Switch from an Interior Design Sole Proprietorship to an LLC

No matter the type of business structure you choose when you open your interior design business, it can also be changed as your business grows and circumstances change. 

Here are some reasons business owners switch to an LLC:

• The business has grown. It is no longer a one-person operation
• Tax liability is increasing
• Seek credibility to match that of their more established business
• Potential liability concerns are on the rise 
• Plan to seek loans or investors

How to go from Sole Proprietor to LLC for Interior Design Business

Changing your interior design business from a sole proprietorship to an LLC is similar to the steps to forming one initially, but you may also need to change your bank accounts, cancel your sole proprietorship, and choose an official name for your business if you have not already done so. 

Choosing Between an LLC & Sole Proprietorship

When it comes to picking a business structure for their interior design businesses, owners often choose between an LLC or sole proprietorship.  Each has its own benefits and drawbacks and therefore neither is inherently better than the other. The decision is best made by comparing the pros and cons to determine which features are most important to the stage, size and future of your interior design business. We hope we have helped by laying out the difference between sole proprietorship and LLC for interior design business.

To continue exploring which business entity is right for you, check out our guide on Is It Better To Have an LLC or Corporation?. Alternatively, if you’ve decided an LLC is right for your business, keep reading and explore our guide to Incorporating “LLC” Into Business Branding.

The information contained in this article should not be relied upon as legal, business, or tax advice. We encourage you to seek guidance from your legal counsel, business or tax specialist with regard to how the information contained in this article may or may not apply specifically to your business.