Sole Proprietor to LLC: Everything You Need to Know
Converting a sole proprietor to LLC is easy when completing the right steps.3 min read
Converting a sole proprietor to LLC is easy when completing the right steps. In addition to choosing a name for your company, you will need to file Articles of Organization, open a business bank account, and acquire a new employer identification number (EIN).
Incorporating Your Sole Proprietorship
When a sole proprietor wants to protect their assets, they will usually form a limited liability company (LLC). This is sometimes called incorporating a sole proprietorship. If you wish to form an LLC, you should do so in the state where you transact business.
For businesses that don't maintain a physical location, such as online retailers, the best place to form an LLC is in the state where the business owner resides. If you plan to use your LLC to purchase real estate, then form the company in the same state as the property you wish to purchase.
Once you have filed the necessary paperwork to form your LLC, you will need to wait for approval from your state. If you have used your own name for your sole proprietorship, you will continue operations as normal once you receive approval for your LLC.
For small businesses, it's very common to start as a sole proprietorship, as this is the default structure for new businesses. People who are the sole owner of a business that have not filed any formation documents with their state are operating their business as a sole proprietorship.
Converting a sole proprietorship to an LLC can seem intimidating when you first begin the process. However, if your business is rapidly expanding, making this transition is crucial for separating your personal and business affairs.
There are several different circumstances where sole proprietor may want to choose a more formal business structure. For example, you may have started your business as a hobby only to find that it has become very successful. Another common reason to convert to an LLC is to protect your personal assets from the debts of your business. You may also have attracted a new client's attention who wants you to form an LLC before giving you their business.
Whatever your reason for forming an LLC, the process of converting your business to this structure is simple and cost-effective. After forming your LLC, you will have access to flexible taxation and your business will now be a legally separate entity. It's even possible that converting to an LLC will change how you see your business and inspire you to work even harder to grow your company.
Once you've finished the process of forming your LLC, you will need to choose what your company's taxation is. You may decide that you want to still be taxed as an individual, meaning you would file Schedule SE and Schedule C forms. If you're not sure what the best taxation option is for your LLC, you should consult with an experienced attorney.
You will also need to make sure that you're maintaining your LLC correctly. Failing to properly maintain your company will usually put an end to your limited liability protections. Every state has different maintenance requirements for LLCs, so you should make sure to check the rules in the state where you formed your company. The most basic requirements are paying a fee and filing an annual report.
Limiting Liability of Your Company
Your main goal in running your LLC is to maintain the corporate veil, meaning you are not mixing your personal and business assets. You should establish completely separate finances for your LLC, including:
- Bank accounts.
- Credit cards.
You should never use your LLC's banking account as if it were your personal account.
If you want your LLC to succeed, there are a variety of actions that you should take:
- Order new LLC business cards.
- Revamp your company's website, including your hosting option and domain name.
- If applicable in your state, update your business licenses and permits.
- Alter any of your other business materials so that they match your new company name.
While forming an LLC will give you several taxation benefits, the protections of this business structure will not apply if you have committed a crime or personally guaranteed a loan and then defaulted on that loan. You will also still need to meet your business tax obligations.
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