How to switch from a sole proprietorship to a limited liability company?

Running a sole proprietorship is the simplest way to start a business.

But as your enterprise grows, so does the risk.

Sole proprietorships don’t protect your personal assets, leaving every thing from your own home to your automotive vulnerable to business liabilities. If this worries you, it is time to consider converting to a limited liability company (LLC).

Forming an LLC gives you greater than just a latest name. It also can protect your personal assets from business debt, provide tax options, and make it easier to hire employees.

Here’s a step-by-step guide to transferring your enterprise from a sole proprietorship to a limited liability company – and what to expect along the way.

But first you is likely to be wondering…

Is an LLC right for my business?

Before selecting a latest business entity, it is clever to consider the whole picture. Which is good for one company owner will not be right for you.

Here are some things to consider when deciding whether an LLC is right for your enterprise.

Liability protection

Without a doubt, one of the biggest advantages of forming an LLC is protection from personal liability.

As a sole proprietor, your enterprise debts are your personal debts. An LLC typically protects assets (reminiscent of your own home, automotive, and savings) from business liabilities.

This implies that if someone sues your organization or defaults on a loan, they will not have the ability to touch your assets.

Tax advantages

LLCs can offer tax flexibility, including the option to elect S-Corp taxation.

Why does this matter?

You can save on self-employment taxes if your LLC is taxed as an S-Corp. Instead of paying taxes on all of your profits, you’ll be able to put a part of your income towards a salary and the rest towards paychecks, which can result in a lower tax rate.

Hiring employees

If you are considering hiring employees, switching to an LLC makes things easier.

People consider an LLC to be a separate entity from you, the owner. This facilitates payroll, worker advantages and tax compliance.

State-specific restrictions

Depending on the occupation, some states restrict certain licensed professionals (reminiscent of lawyers and accountants) from forming LLCs.

Please check the rules in your state before proceeding.

You also can meet with a registered agent specializing in the formation of LLCs for more advice. More on this in a moment.

Does switching to a limited liability company cost money?

Yes. Switching to an LLC also involves costs that you need to budget for.

Here’s a breakdown of what to expect:

• Application fees they vary by state but typically range from $50 to $500. Some states also charge annual franchise taxes or LLC maintenance fees.
• Legal costs: Depending on the complexity of your enterprise, hiring a lawyer to enable you to prepare an operating agreement, transfer assets, and ensure regulatory compliance can cost anywhere from several hundred to several thousand dollars.
• Tax consequences: If you transfer property or inventory, chances are you’ll face tax consequences. Consult an accountant to understand the potential capital gains or sales tax implications.

6 steps to moving from a sole proprietorship to an LLC

If you’ve got decided that an LLC is the right move for you, here’s what you wish to do to transfer your enterprise:

Step 1: Confirm your organization name

The first step is to make sure your enterprise name is available. Check your state’s business name database to avoid conflicts. You also want to make sure that no one else has stolen your name and surname.

A fast search on the United States Patent and Trademark Office (USPTO) website can enable you to avoid legal problems.

If your chosen name is not available, consider selecting a unique variety. For example, try adding your location or a descriptive term to make your name stand out.

Step 2: Assemble your organization articles

Filing the Articles of Organization creates your LLC.

This document accommodates key information about your LLC, reminiscent of its name, address, and designated person registered agent (the person or company receiving legal documents on behalf of your LLC).

Each state has its own application process, fees, and approval deadlines, so check your state’s specific requirements.

The application fee is typically between $50 and $500, depending on the state. Once filed, your LLC becomes an official legal entity.

Step 3: Prepare the LLC Operating Agreement

The LLC operating agreement outlines how the business might be run, how profits might be divided, and the role of each member (if you have partners).

Even if you are a single-member LLC, preparing this document is essential.

It might help prevent disputes, establish a clear profit-sharing structure, and show the IRS that you just are operating as a separate business entity.

(While it’s possible to draft this yourself, it’s clever to seek the advice of with a lawyer to make sure the contract covers all the essential bases.)

Step 4: Obtain a latest EIN from the IRS

An Employer Identification Number (EIN) is like your organization’s Social Security number. Even if you were a sole proprietorship, you wish a latest EIN to form an LLC.

You can apply for one online through the IRS website, freed from charge. You’ll need it to file taxes, hire employees, and open a business checking account.

Step 5: Set up a latest one company checking account

Keep your personal and business funds separate to protect your limited liability status.

Open a latest checking account for your LLC and transfer all business-related funds. (This practice also simplifies accounting and makes tracking easier business expenses.)

Step 6: Apply for the essential licenses and permits

Depending on your enterprise type and location, chances are you’ll need latest licenses or permits. Check with your local government to see if your current business license covers a latest LLC or if you wish to apply for a latest one.

Additional steps often missed during the transition

Here are some more necessary steps that must be taken when switching from a sole proprietorship to a limited liability company.

Transfer assets and liabilities

Once you have formed your LLC, you will need to transfer all business assets and liabilities from your sole proprietorship to the latest LLC. This includes equipment, inventory, mental property and contracts.

This is a “capital contribution”, which suggests you are investing these assets in your LLC.

You may even need to transfer other liabilities reminiscent of loans and debts. Contact your lenders to update your loan agreements so that the LLC is now liable. Note that some lenders may require personal guarantees, even for an LLC.

Update contracts and business agreements

Update every contract and agreement you had as a sole proprietor to reflect your latest LLC status.

Review existing customer, vendor, and supplier contracts to determine whether or not they need to be reassigned. Then notify all interested parties of the change.

(Remember to update your enterprise cards, website, marketing channels and online listings.)

Hiring skilled advice

Switching from a sole proprietorship to a limited liability company is a big step. Having skilled help can prevent time, money and stress. Plus, you may breathe easier knowing every thing is arrange appropriately.

Consider the following support options:

• LLC Formation Services: These services can handle every thing from filing Articles of Organization to drafting an operating agreement.
  • Make sure you select a reputable service with experience in your state.
• Professional legal advice: A lawyer can enable you to prepare contracts, transfer property, and comply with state laws.
  • Look for a lawyer who specializes in small business law.
• Tax planning: An accountant can enable you to navigate the tax implications, including the advantages of electing S-Corp status.
  • Choose an accountant who specializes in working with LLCs.

Wrap up

Transferring to a limited liability company can provide protection from personal liability, tax flexibilityand a more structured business framework. Before taking such a step, nevertheless, it is necessary to weigh the costs and advantages.

Following these steps and consulting with the right professionals can set your enterprise up for success.

Legal Disclaimer:

Regardless of the entity you select, a business lawsuit can still result in you being held personally liable. Even if you select an LLC, consider this consulting a registered agent before choosing a business entity.