A few years back, you embraced entrepreneurship and joined the ranks of over 33 million American small business owners. At the time, you decided that a sole proprietorship would be best for your needs, and didn’t think anything else of it.
But now that you’re more experienced, you’re considering other options. For example, a limited liability company (LLC) may suit you better, so it may be a path worth thinking about.
In this article, we’ll show you how to change a sole proprietorship to an LLC after answering some questions and concerns you may have.
Can a Sole Proprietor Be an LLC?
No, a sole proprietor can’t be an LLC, at least not initially. This is because the definition of a sole proprietor is “someone who owns an unincorporated business by themselves”. An LLC isn’t an incorporated business, but if you treat your LLC as one, then it’s not possible for you to be a sole proprietor.
On that note, you may have this question: Is an LLC a corporation or a sole proprietorship? The answer is neither. Instead, you should think of it as a blend between the two, which offers you many of the benefits found in either choice.
An LLC vs Sole Proprietorship
Now that you know more details about having a sole proprietorship and forming an LLC, you might be wondering what advantages there are to taking action. After all, the pros need to far outweigh the cons to make it worth your time.
Here are the factors that give LLCs an edge.
More Partners and Owners
As the name suggests, you can only have one owner for a sole proprietorship. With an LLC, you can initially choose to run the business by yourself too.
However, if you want to add partners and owners in the future, you’ll have the flexibility to do so. These can be individuals, corporations, or even other LLCs.
More Asset Protection
As a sole proprietor, you’ll have unlimited personal liability. This means that if your business has legal or financial issues, your own assets are at risk.
If you have an LLC though, your assets are separate from the company’s. This is one of the biggest advantages of having an LLC; you’re protected from business liabilities.
More Flexibility
Both options are pretty flexible in their own ways. A sole proprietorship is simple to set up and manage, and you’ll have flexibility in decision-making and business operations.
On the other hand, LLCs offer you more flexibility in terms of management structure and profit distribution. For example, the owners can choose how they want the business to be taxed.
Continuity
Typically speaking, business continuity for a sole proprietorship may come with multiple hurdles if you become incapacitated or pass away.
LLCs have better continuity with provisions for the transfer of membership interests. So if you decide to withdraw from the LLC, or become incapacitated or die, that doesn’t necessarily mean your LLC will come to an end.
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How to Change a Sole Proprietorship to an LLC
Before we get started, do note that it’s not always possible to change a sole proprietorship to an LLC. Some states have laws prohibiting specific professionals from creating LLCs in the first place (such as lawyers), so this may be a dead end for you. Make sure to do your due diligence to avoid disappointment.
With that said, below are the steps to change your business into an LLC. They’re basically the same as forming a brand-new LLC, but with some small differences.
Choose a Business Name
First, you’ll need to choose a business name that follows your state’s LLC naming laws.
If you want to keep the business name from your sole proprietorship, then you’ll be pleased to know that you can do so, as long as it’s not already taken by another LLC. In addition, it should be a name that isn’t trademarked.
File Articles of Organization
After choosing your business name, you’ll need to prepare and file the articles of organization. This usually includes your LLC’s name, address, members, and purpose. When filing, you’ll have to pay a fee too.
Create an Operating Agreement
The operating agreement outlines the rights and responsibilities of the LLC’s members/owners, as well as how the business will be operated.
It’s not always required by law to have one for an LLC, but it’s highly recommended that you do so. Should any legal disputes arise, the court will use this document to aid their rulings.
To take care of both documents at once, have Business Anywhere take care of business registration for you. Our services are affordable and quick.
Get an Employer Identification Number (EIN)
If you already had an EIN from your sole proprietorship and think you don’t need to reapply, then think again. You’ll have to file Form SS-4 to get an EIN for your new LLC.
If you didn’t have one before, you should still get an EIN for tax purposes.
Transfer Your Assets and Liabilities
Next, transfer all your assets and liabilities to your new LLC. Update contracts, licenses, permits, and business accounts to reflect your new LLC structure.
Update Information and Notify Tax Authorities
Contact the appropriate authorities to update your business licenses and permits. You’ll also need to update contracts and agreements with clients, vendors, and other relevant parties.
Let the IRS and your state tax agency know about the change in business structure. It’s your responsibility to ensure compliance with any tax obligations associated with the transition.
Close Your Sole Proprietorship Accounts
Close any bank accounts, credit cards, or other financial accounts associated with the sole proprietorship. Then proceed with opening new accounts in the name of your LLC.
Changing a Sole Proprietorship to an LLC Isn’t Difficult
Now you know how to change a sole proprietorship to an LLC. If it’s possible in your state, then it’s a great decision to make, as it’ll offer more personal asset protection and flexibility.
And if you employ our services, the transition won’t be difficult at all. All you’ll have to do is create an account, submit the necessary information, and we’ll take care of the rest.
If you’d like assistance with changing your business to an LLC, then sign up with Business Anywhere now. We’ll handle all the paperwork so you don’t have to.
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