1. Is it Time to Convert Your Sole Proprietorship to a Corporation or LLC?
2. Comparison of a Sole Proprietorship vs. LLC
3. Converting a Sole Proprietorship to an LLC

If you're wondering how to change sole proprietorship to LLC, it is important that before you begin, you fully understand how this process is completed. Also, it is critical that you compare these two business entities in terms of your company's needs and objectives.

If you would like to formalize your business, converting to an LLC is rather simple and affordable. You will need to take a number of steps and file specific paperwork, known as articles of incorporation. You should also be aware of your obligations to the IRS.

Is it Time to Convert Your Sole Proprietorship to a Corporation or LLC?

As a small business owner, you may be wondering whether you should incorporate and, if you do, when is the right time? Most businesses tend to start off as sole proprietorships. This allows individuals to start selling a product or service, even if they have not put much thought into their overall business plan.

Frankly, business owners often do not want to go through the hassle or cost of incorporation until they know that their business is viable. In other cases, owners do not believe that their business is a big enough risk and, therefore, they feel it does not require protection. Although these are legitimate ideas, it is critical you learn to protect yourself from the risks for which you may be liable.

So, when should you convert to an LLC? Because it provides protection, the answer is typically as soon as possible. However, if you are approaching the end of the year, it may be best to wait until the first of January. The reason is that operating two types of businesses (a sole proprietorship and a corporation) during the same year will require two tax returns. This can not only become more complicated but also more costly.

Whether it's best for you to form an LLC or incorporate will depend on a number of variables, including the number of owners involved and your financial goals. For example, an LLC will end if a member passes away or becomes bankrupt, whereas a corporation will continue regardless of such events. This means you need to select the option that best works for you.

Comparison of a Sole Proprietorship vs. LLC

  • When you are in business as a sole proprietorship, you can face some severe consequences in terms of lawsuits.
  • When you form an LLC, your business is considered a separate entity. This means the LLC will become subject to legal issues, instead of you becoming personally embroiled.
  • In terms of taxation, an LLC receives its own tax ID number. Additional paperwork is required to obtain this unique number — which is your LLC's employer identification number.
  • In comparison to a sole proprietorship, which can only have one member, there is no limit to the number of owners or members an LLC can have.

Converting a Sole Proprietorship to an LLC

If you decide to convert from a sole proprietorship to an LLC, you will need to register a unique business name. Unfortunately, your current name may already be taken by an LLC in your state. If you find that to be the case, you can no longer use that name — even if you have been using that name as a sole proprietorship. To check the availability of your name, you will need to contact your state's secretary of state office.

Once you have decided on an available name, which must include "limited liability company" or an abbreviation such as "LLC," you will need to file your articles of incorporation. This will be followed by the creation of your LLC's operating agreements, arrangements with the IRS, and the application of any licenses or permits.

Converting from a sole proprietorship to an LLC may seem straightforward, and in many ways it is. However, it can also become fairly complicated. You want to make sure each and every step is completed correctly in terms of your state's regulations and guidelines. If not, you could face consequences in the future. That is why it's best to seek professional assistance.

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