How To Change Sole Proprietorship To LLC: Free Guide
Many business owners begin their enterprises as sole proprietors. As the business grows, it is common to investigate another business structure – the Limited Liability Company, or LLC. Many economists and business experts consider the LLC to be the “best of both worlds” for small business owners. Like a sole proprietorship, it is easy to set up and operate, but it also provides a separate legal entity just like an S-Corp. This protects LLC owners because it separates the business and personal finances. This provides a simple legal structure and peace of mind. We will lay out the steps to take to convert your small proprietorship in this easy-to-follow guide. While the conversion process is relatively straightforward, it may be helpful to seek guidance from LLC formation services. These services can help with the paperwork and provide guidance on the process. They can also ensure that all necessary steps are taken to properly convert the sole proprietorship to an LLC. So we recommend the leading LLC formation services that can help you with the task.
Sole Proprietorship Vs LLC
For small business owners looking for a simple legal structure and peace of mind, converting a sole proprietorship to an LLC is a smart move. Both are easy to set up and operate. However, only the LLC offers the added benefit of liability protection. With the right guidance and resources, making the transition to an LLC can be a smooth and simple process.
|Ownership||The owner/operator is a single individual||The entity is operated by owners known as “members”|
|Taxes||Profits pass through to the owner’s personal income taxes||Flexibility to use pass-through or corporate tax structure|
|Legal protection||The proprietor is personally responsible for debts and liability||The LLC itself is responsible for debts and liability, while the owner’s personal assets are legally protected.|
A sole proprietorship is a business owned and operated by one individual. The owner has complete control over the business and is personally responsible for all debts and liabilities. Sole proprietorships are not separate legal entities, and the owner reports the business’s income and expenses on their personal tax return.
Limited Liability Company
A Limited Liability Company (LLC) is a business structure that offers the flexibility of a partnership with the liability protection of a corporation. LLC owners are called members and their personal assets are protected from the company’s business debts and obligations. The LLC is often the best choice for small businesses because it is both easy to set up and yet still offers protection from liability. Compared to the Sole Proprietor, the LLC stands out because it offers protection against liability for the owners’ personal property, money, and assets.
Read More: LLC Vs S Corp
Why & When Change From Sole Proprietorship to LLC?
A major advantage of an LLC is its ability to provide limited liability for its owners. By separating a company and its assets, you protect its own property as well as ensure that their debt remains the property. You have no personal liability. Because of this limited liability policy, you could consider switching from sole proprietorships to LLCs if you are afraid that your private information may be subject to litigation. If you are worried that your car or money account might become infringed in lawsuits, an LLC can provide the best solution.
How To Change Sole Proprietorship To LLC?
The legal requirement for the conversion of a sole proprietorship into an LLC starts when it registers the business in its name. The process includes creating an entity name and registering a registered representative, drafting the operating agreement, and getting an Employer Identification Number (EIN) for tax purposes. We will now describe every step here a bit further.
Choose a Business Name for Your LLC
The LLC is its own business entity, and thus will have a unique name, which must end in “LLC”. Most states have searchable databases where the owner can check to see what name is available. Then file the required legal papers to reserve the name.
Choose a Registered Agent Service
Each LLC must have an official address and person responsible so that the entity can receive government correspondence. These documents include tax forms, lawsuits, subpoenas, and business paperwork from the state or federal government. The person responsible is the registered agent. Some LLC operators serve as their own agents, but many elect a third-party service which is a convenient and efficient way to receive legal papers.
Read More: Best Registered Agent Services 2023
File Articles of Organization
In order to officially form the LLC, a document must be filed that gives the basic information about the new venture. The Articles of Organization is this legal document that outlines the fundamental characteristics of the LLC. It typically includes the LLC’s name and purpose, the duration of the company, the management structure, the registered agent’s name and address, and the names and addresses of the LLC’s members. It also specifies the LLC’s capital structure and how profits and losses will be allocated. This document is filed with the state government to register the LLC.
Create an LLC Operating Agreement
The members also must draw up a document that describes how the duties of all parties are divided and how the business will be operated. The LLC Operating Agreement is a sort of bylaw for the members to follow.
Obtaining an EIN
It is important to establish a separate identity for the LLC. Thus, the new entity needs a federal identification number known as the EIN (Employer Identification Number). The EIN is used when applying for business credit, filing tax documents, or anytime the company must be identified as the same legal entity.
Apply for a Business Bank Account for Your LLC
Mixing funds from the LLC with any of the members’ personal accounts is a major mistake. This creates an impossible accounting system and blurs the separate identity of the LLC. This could even lead to major misunderstandings or even accusations of fraud and embezzlement. Therefore, it’s vital to establish an LLC bank account in the business name. This makes it clear that there is a separate entity and helps preserve personal liability protection.
Apply for Business Licenses
In most jurisdictions, the requirements for LLCs are a bit more detailed than a sole proprietorship, requiring business licenses and other documentation. Make sure to obtain any relevant business licenses required by your state.
Read More: How To Convert LLC To S Corp
The Top 2 LLC Services
|Northwest Registered Agent||ZenBusiness|
|Award||Best Overall||Most Affordable|
|Detail||Read Review||Read Review|
Northwest Registered Agent
With a long track record of success attested by their 3 million customers, Northwest is a trusted and reliable name in LLC formation and Registered Agent services. Northwest provides incredible friendly and helpful customer service through their Corporate Guides, who walk clients through every step of the process of forming the LLC. They always pick up the phone – no automated call menus or chatbots ever. Northwest also provides nationwide reliable registered agent services, which have excellent data security.
With thousands of 5-Star reviews in the last few years, Zenbusiness is a hot name in the LLC formation field. Their intuitive user experience is considered state-of-the-art by reviewers and easy to use by customers. They have three transparently priced options that all offer excellent formation and compliance service. Zenbusiness also offers faster turnaround times than Northwest.
Small business owners are often wise to turn their small proprietorship into an LLC. The LLC entity remains easy and inexpensive to set up and operate. However, that corporate designation separates the personal and business finances in a way that provides peace of mind – leaving the members’ personal assets free from liability. Even though the LLC formation process is relatively easy, many entrepreneurs find the assistance of a third-party LLC formation service to be efficient and a great return on investment. For today, we find that Northwest Registered Agent and Zenbusiness provide the best value and most assistance in converting your proprietorship to a Limited Liability Company.
Frequently Asked Questions (FAQs)
Yes, there are many legitimate and helpful LLC formation services. Use professional reviews and user ratings to evaluate the best services. For example, Northwest Registered Agent and Zenbusiness are well-known reputable companies.
Yes, a single person can form a single-member LLC. If the venture will have more than one owner, the partners should form a multi-member LLC.
Yes an LLC can be sued for debts or damages. However, what makes the LLC entity safer for the members is that the suit proceeds only against the company. The member’s personal assets are separate and protected.
It is imperative that an LLC use a new bank account for business activities. The account must be separate from any individual’s accounts. This preserves the separate business entity identity.
Small businesses may form one of a variety of business entities. They include small proprietors and partners which are an extension of the owners’ personal identity. S-Corps and C-Corps are more complex corporations that are governed by a board of directors. The Limited Liability Company is a sort of middle ground used by many small businesses. LLCs provide a separate legal entity, and protect liability – but are also easy to form and operate.
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