If you’re considering changing a sole proprietorship to an LLC, you may have good reason. A Limited Liability Company could save your livelihood and company depending on your business setup. Sole proprietorship’s give no protection and leave little room for business growth. Based on the goals for your small business, here’s why and how to make the switch to an LLC.
Why Change to an LLC?
1. Legitimizes Your Company
A huge step in the business growth direction is coming out of micro business mindset. Adding the LLC label will change the way you and others view your operation. You may not think a single member LLC has much benefit. It does gives you a business name and entity that a sole proprietor doesn’t have. The protection factors are also there for whenever you take the option to expand.
2. To Attract Investors
Forming an LLC doesn’t just give you the look. It’s actually a step toward distinguishing business finances from personal. According to Business Insider, investors are more comfortable with entrepreneurs who take measures to separate personal and business assets. When you’re ready to expand or take on business acquisition loans, make sure an LLC is the right fit.
3. Asset Protection
With sole proprietorship’s, you or your employees’ negligence falls back on you. If a customer suffers personal injuries and files a lawsuit, they won’t go after a fictitious company. In that case, the company is you. That means assets like personal bank accounts, retirement funds, home, cars and boats are up for grabs. An LLC provides some protection from this.
In the case of litigation, you’re protected if actions from your employees cause a lawsuit. If you fall behind or the business goes under, creditors cannot seize personal assets either. Not even in the case of a bankruptcy.
4. Tax Benefits
With an LLC, you don’t have to pay taxes twice. Owners and partners can file profits and losses on their personal return. Other entities must file a business return and claim income on their personal tax return. Single member LLCs must file everything on their personal return using a Schedule C. The IRS doesn’t have separate tax laws for this entity, so LLCs follow procedures of either sole business owners or partnerships.
5. Easy to Add Officers or New Owners
Another good thing about an LLC is the convenience of making changes. Adding or removing details like officers or managers is a simple process. It may require a short form and a small fee. However, there’s no need for a long explanation, a vote or a drawn out procedure.
Changing a Sole Proprietorship to an LLC
Forming an LLC is a simple process with minimal paperwork. Some entrepreneurs hire an attorney to draft and file the paperwork. Websites are also available to save you some time and complete the LLC documents for you. Or you can save the money you’ll pay either of them and do it yourself. Whatever route you choose, you need to educate yourself on the process. That way you can make sure your documents are correct. Understanding procedures and fees vary by state, changing a sole proprietorship to an LLC takes the following steps.
Step 1:
Choose a company name. The name will be the same for your LLC with the entity attached (Ex. XYZ Computer Repair will be XYZ Computer Repair, LLC). Previously as a sole proprietor, you may or may not have had a name. Sole proprietors have the options to use your personal name or a fictitious name in the form of a DBA (doing business as). If you chose a fictitious name, you may want to continue using that name if it’s available. Have other options in mind just in case that name isn’t available.
Step 2:
Visit the Secretary of State website for the location you wish to file your Articles of Organization. Conduct a business entity search for the company name you wish to have. If the name is available, reserve it on the Secretary of State’s website and print your certificate. The reservation gives you rights to the name for one year, so apply for your LLC during that time frame.
***Prepare to pay a fee of at least $28.
Step 3:
Having your small business organizational chart handy will help you with the next step to complete the Articles of Organization. You can download a simple form from the SOS website’s business services section or draft your own document. The form gives information about your business, industry, members, and officers (if any). There are several short sections to complete:
- Name of Company– This would be the name you reserved after conducting an entity name search.
- Statement of Purpose-You don’t need an elaborate statement. For instance, you can write “to operate a web based marketing business”. An even more general statement is “to conduct a legal for-profit business”. The less specific, the better just in case you want to use the same LLC for multiple ventures.
- Duration- If you plan to use the LLC until you sell the business (or forever), write “Perpetual”. If the business or entity is temporary, write the actual from/to date.
- Principal Place of Business-Enter the address of your company’s headquarters. If your business is mobile or home-based, use your co-working office address or home address.
- Registered Agent-Whomever you appoint to be responsible for accepting tax and legal documents for the company is the registered agent. It doesn’t have to be a member, officer, or employee but it can be.
- Management-If hiring managers separate from LLC members, make that clear in this section and add their names. If members choose to handle management, indicate that here.
Step 4:
Make copies of the documents. File them with your local probate court, who will send them to you Secretary of State’s Office. Pay the filing and SOS fees. Fees could range from $100-200 depending on if you’re local or out of state (known as domestic or foreign). You will also get one of your copies stamped to keep for your records. Include the fee amounts in your business plan for your business loan application.
Step 5:
Wait for your official certificate of formation to return in the mail. Enclosed you will find your original Articles of Organization with a timestamp and seal.
Changing a sole proprietorship to an llc has some worthy benefits. Yet each entity type has its pros and cons. Depending on the size and setup of the organization, you need to make sure an LLC is right for your business. You should also know IRS rules to avoid penalties for yourself and shareholders. It’s best to get advice from a business professional before selecting a new legal entity.