How to Change Your Sole Proprietorship to an LLC: 6 Easy Steps

many small businesses get their start as a sole proprietorship. After all, it ’ s the default business structure. If you ’ re a single business owner and never filed any official formation paperwork with the state, then you ’ re operate as a sole proprietorship. There comes a time when a lone owner wants to formalize the commercial enterprise. possibly you realized that your side hobby is nowadays a legitimate and blossom occupation. possibly you realized that operating as a sole proprietorship puts your personal savings and assets at risk should your business incur any debt or be sued. Or possibly you want to take on a new client who requires you to operate as an LLC or corporation. No matter the rationality, the bottom line is it ’ sulfur low-cost and relatively simple to create a limit Liability Company ( LLC ). And, there won ’ metric ton be many changes in the way you operate your business. On the plus side, the LLC puts interval between your occupation and your personal assets and you ’ ll have more tractability in how your clientele is taxed. You may flush change your perception of your occupation and feel more motivation to see it grow. If you ’ rhenium concerned in forming an LLC, here ’ s the general process. note that specifics will vary by state, but these six steps will give you a general idea of what to expect.

Moving From Sole Proprietor to LLC

1. Research to Make Sure Your Business Name is Available in Your State

Let ’ s say that Jane wants to form an LLC for her business, Jane ’ sulfur Candies. She needs to make sure that there already isn ’ triiodothyronine another business called “ Jane ’ randomness Candies ” registered in her state. To check the handiness of a mention, you can contact your country ’ randomness secretary of express office ( some states offer an on-line searchable database ). Another option is to have an on-line legal filing servicing do the search for you – and many sites will offer this basic search for free .

2. File Articles of Incorporation with Your State Government Office

The adjacent step is to file specific paperwork, often known as Articles of Organization, with your state office. The document is straightforward and you ’ ll be required to provide information like :

  • The name and address of your LLC
  • Your LLC’s purpose. You typically won’t need to be specific here, and can even give a general answer like “The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state.”
  • The name and address of your registered agent (this is the person designated to receive official papers for the LLC).
  • An indication of your management: will your LLC be member-managed or manager-managed?

3. Create an LLC Operating Agreement

While the LLC is a bang-up choice for those business owners looking for increased personal protective covering with less formality, there however is some paperwork involved. Some states require LLCs to create an operate on agreement. This document is an official contract that spells out the management and ownership of the LLC. It can outline details like how much of the company each extremity owns, everyone ’ s voting rights ; how profits and losses should be distributed among the members ; and what happens when person wants to leave the occupation. The operational agreement can fair be a few pages, and you can find some samples on the Web. even if your state does not require an operate agreement, it can be an important document to help clarify verbal agreements and prevent misunderstandings .

4. Register with the IRS

When you form an LLC, you ’ ll want to apply for a newfangled EIN ( Employer Identification Number ) with the IRS. This is most probable true even if you already had an EIN as a sole proprietorship. You can apply for an EIN here. The EIN is used for opening clientele bank accounts, filing taxes, handling payroll, and obtaining business recognition .

5. Apply for a New Bank Account

If you had a commercial enterprise bank score for your sole proprietorship, you ’ ll need to close that account and open a new one in the LLC ’ mho list ( and with your newfangled EIN number ). nowadays that you ’ re an LLC, you ’ ll want to maintain a crisp separation between your business and personal finances. This will help shield your personal assets from the business – and has the add benefit of streamlining your business ’ records for tax report.

6. Apply for Business Licenses and Permits

Don ’ deoxythymidine monophosphate forget about any of the licenses and permits that are required to legally run your business – such as a master license, reseller ’ s license, or health department license. Some states require that you reapply for a license when your occupation social organization changes. You can contact your local position or a site like to find out about your specific license requirements. That ’ s it. With those six basic steps, you ’ ve now formalized your business activities into a formal business structure.

If you ’ re wondering what comes next…you can opt to be taxed as an individual and still fill out the Schedule C and Schedule SE like you did as a lone owner. Or check with your CPA/tax adviser to see if there ’ s a better tax scheme, since you nowadays have more options as an LLC than you did as a sole airplane propeller. last, you ’ ll need to maintain your LLC, or you could end up losing your personal liability protective covering. Check to see what your state ’ randomness maintenance requirements are, as you ’ ll typically be required to file an annual Report ( it ’ s a very simpleton form ) and pay a nominal tip.

Best of fortune on your business venture, and congratulations on taking this important pace toward creating a firm foundation garment for your new business. LLC Computer Photo via Shutterstock

CorpNet offers business formations, filings, state tax registrations, and bodied complaisance services in all 50 states. Express and 24 hour rush charge services available upon request. Click here to learn more .

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Category : Finance

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