When you convert your sole proprietorship to an LLC, you formalize the business and enjoy limited liability.
To convert a sole proprietorship to a limited indebtedness ship’s company ( LLC ), you ‘ll file the same paperwork as you would if you had created the LLC from scratch. You ‘ll besides update sole proprietorship registrations ( including business permits, licenses, and trade name registrations ), bank accounts, and contracts to reflect the exchange. Becoming an LLC offers you a count of benefits, including protecting your personal assets from the debts of the business and adding credibility to your business by communicating to vendors and customers that you own a formally registered caller. however, an LLC is not an option for every company, and converting to that structure might mean you will pay more taxes and fees than had you stayed a sole proprietorship .
Advantages of an LLC
equally soon as you begin doing business by yourself ( and in some states, with your spouse ), you have a exclusive proprietorship. In the eyes of the law, the sole proprietorship and the owner are one and the lapp. When the business owes a debt, so does the owner. If person brings a lawsuit against a sole proprietorship, it is the same as suing the owner. The owner ‘s personal assets like his car and bank history, are on the cable to satisfy the debts of the occupation .
An LLC is its own occupation entity, discriminate from the owner. The LLC does not exist until the owner forms it with the state. The LLC owns property and enters into contracts. This commercial enterprise structure provides restrict liability protection for the owner, which means that owners are not personally responsible for the debts of the occupation. Creditors sue the LLC, not the owner, and the total they can collect is limited to the assets of the LLC.
Taxation of Sole Proprietorships and LLCs
When you own a sole proprietorship, you do not file a separate commercial enterprise tax return, nor do you pay bodied tax. You report the business income and losses on your personal tax refund. An LLC has more options when it comes to taxes. By default, after you form an LLC you will continue to pay taxes as a lone owner, and you can continue to avoid bodied tax. however, you can file paperwork with the IRS to elect C Corporation or an s Corporation tax status .
Disadvantages and Limitations of an LLC
Converting to an LLC takes prison term and might cost you more money than continuing your commercial enterprise as a sole proprietorship. You will not owe extra federal taxes unless you elect C Corporation tax status. however, your state might have file fees, annual fees, and other department of state business taxes you did not pay as a sole proprietorship .
not every type of business can form an LLC. In some states, licensed professionals such as attorneys and accountants can not form LLCs ( alternatively, they ‘re typically organized as professional companies ). In states where professionals can form LLCs, the LLC might not protect their personal assets from malpractice claims. For more information, see Forming a Professional LLC.
Steps to Convert Your Business to an LLC
To change your business from a sole proprietorship to an LLC, you must create an LLC according to the laws of your submit, and update your lone proprietorship registrations and accounts. The steps include :
- Dissolving or canceling any registered Fictitious Business Names or Doing Business As (DBAs) for your sole proprietorship, if you intend to continue using the same tradename. Some states allow you to register an LLC with the same tradename (so long as the owner is the same on both registrations), while most states require you to cancel the registration under your sole proprietorship before forming the LLC.
- Choosing a business name that complies with your state’s laws, which might mean changing or updating your current name. The name must be different from any business name already registered, which you can verify by using your state’s business search tool. Many states require LLCs to include “limited liability company,” “LLC,” or another abbreviation in the name.
- Selecting a registered agent, which is the individual who will receive governmental notices on behalf of the company. You can list your name or use a registered agent service.
- Filing Articles of Organization, also known as a Certificate of Incorporation or Formation, with your Secretary of State and paying the filing fee.
- Drafting an operating agreement, which is an internal document that outlines how you will manage your LLC.
- Applying for an Employer Identification Number (EIN). If your sole proprietorship used an EIN, you will need a new number after forming an LLC.
- Opening a bank account or changing your bank account information.
- Contacting licensing agencies to update your information and verify that your registrations and licenses apply to your LLC.
- Updating business information on all marketing materials, such as your website and business cards.
- Reviewing your current contracts with vendors and customers and changing the party to the contract (from your name to the LLC name).
Who Is Responsible Under Your Existing Contracts: You or Your New LLC?
front at the contracts you entered into as a sole owner and look for a article entitled “ Assignments ” ( an grant is where a party to a narrow transfers obligations and/or rights to person else ). A typical assignment clause will prohibit the grant of responsibilities without the accept of the other party. grant clauses can apply evenly to each party ; or the party with more negotiating pull might be the only one to have forbid office.
If you ‘re lucky, you ‘ll read that you can assign your duties under the old sign to your LLC, without needing the other side ‘s o ( chances are you ‘ll besides be able to assign rights, such as receiving requital ). Your appointment will mean that you will not be personally responsible for responsibilities under the compress. however, some contracts that allow assignments include a provision that the original parties guarantee performance careless of assignments ( meaning you will continue to be personally liable ) .
If the condense prohibits assignments unless the other side consents, talk to the other party about amending the agreement or entering into a new condense ( your article might even prohibit assignments outright, but that ‘s efficaciously the lapp as prohibiting them without accept, because parties can always agree to modify a clause ). To amend an existing contract, confer with an lawyer to ensure the changes are legally binding. If the contract prohibits assignments and the other party does not agree to an amendment, you will continue to be personally responsible for the obligations under the sign .
Maintaining Your Limited Liability Protections
After you change your business to an LLC, process it as a classify business entity, and not a sole proprietorship. If you blur the lines, you could lose your express liability security. Proper care of your LLC means following corporate formalities ( such as filing annual reports and creating and following an manoeuver agreement ), and keeping your personal assets separate from the caller ‘s assets. To keep your personal assets separate, transfer ownership of all business property to the LLC, list the LLC as the party on all newly contracts, and open a freestanding bank account for the LLC .