Many small businesses start off as a sole proprietorship – it’s the default business structure. But there may come a time when the business wants to become properly formalised for many reasons; perhaps the owner realised that their personal assets are at risk, or they want to take on a new client that requires the business to operate as an LLC or corporation.
No matter what the reason is, simply put, it is very possible and affordable to change a sole proprietorship to an LLC, and there aren’t a huge number of changes that need to be made. Every state allows you to form an LLC by converting your sole proprietorship.
An LLC is completely separate from you, so you are safe from anything that happens to your business. If you’re a sole proprietorship, you’re open to any lawsuits and bankruptcy that may come your way.
An LLC can offer you tax advantages over a sole proprietorship, so you can structure your business taxes in different ways.
More than one person can own an LLC, whereas in a sole proprietorship there can only be one owner. However, a single-member LLC can be used if that’s what you prefer – meaning you’re the only owner.
Here’s a quick step-by-step process on how you can do so. It is important to note that this is a general idea – specifics will vary depending on what state you’re in.
Your LLC name cannot be the same as another LLC’s in the same state. To check the availability of a name, you can contact the state’s secretary of state office. Another option is having an online legal filing service do the search for you.
File articles of incorporation with your state government office
Now that you’ve decided a name, you need to file specific paperwork. The document is pretty straightforward, and you’ll be asked things like the name and address of your LLC, your registered agent, your LLC’s purpose, and how you are going to manage your LLC.
While there is much less paperwork involved in making LLCs than other business structures, there is still some paperwork involved. Even if an Operating Agreement isn’t absolutely compulsory in some states, it is strongly recommended, as this document is an official contract that spells out the management and ownership of the LLC. It can get into specifics, like everyone’s voting rights, how much of the company each person owns if you’re opening it with other people, and what happens if someone would like to leave. The more specific it is, the better, as it will help with agreements and clarify any misunderstandings someone might have.
You’ll need to apply for a new EIN with the IRS, because your LLC is now a legal entity that is separate from you. The EIN is crucial in separating you, as it is used for things like opening a new business account and filing taxes.
If you had an old business account for your sole proprietorship, you’ll need to ditch that and open a completely new one – being a new LLC, you’ll have to have a sharp separation between your personal and business finances. This will help shield your personal assets – one small mistake can mean your limited liability feature does not exist anymore, and will also assist you in documenting business records for your company’s finances.
Some states require you to reapply for new licences and permits when you open a new business. Most permits will be based on what your services entail, rather than being a state necessity.
Want more details on how to form an LLC? Visit this site for extra information.