Many people seem to be interested in how someone can move from a sole proprietorship to an LLC. While there are many personal stories on the internet, they offer little legal information or resources that readers can effectively use in order to make this change. Below, you will not only find great tips to give you, but also important online legal resources that will teach you everything that you need to know in order to move from a sole proprietor to LLC.
You may consider that this change is too official, and being a sole proprietor is safer, due to the fact that if you ever get a job, you can always walk away. Another common fear that people have is that making this step would complicate their taxes and they wouldn’t be able to keep up with them anymore.
Handling Business Registration
Ask the local county clerk about what papers you need, in advance, and double check that you have everything you need when you go to choose your business name. In some places you are only required to file an assumed name certificate, however, this changes from one region to another.
Choosing your business name basically enables you to be identified by your business name in business situations, regardless of the fact that you are only one person. It’s professional, and it’s the way to go if you’re serious about doing business.
Getting back to the “county clerk’s office” situation, spend time researching the various types of businesses that you can opt for. Each of them has different requirements, advantages, and disadvantages. For example, you can file the paperwork for an LLC from the comforts of your own home, on the Internet. You don’t have to physically go to the clerk’s office. Other business types may require additional legal actions be taken, as well as your presence at the county clerk’s office.
When it comes to LLCs, there is one major advantage regarding how your finances are protected:
Let’s say that someone sues you and wins the case, requiring you to pay a sum of money. The great thing is that the judge will not be able to order you to use money from your personal bank accounts. The same goes for when someone sues you personally; you won’t be ordered to pay from your business bank accounts unless there is evidence that the business was created in order to hide personal assets.
This kind of two-way protection when it comes to your finances may not seem like much, but it’s good to have. You never know what can happen, and the only one who has to benefit from it is you.
Furthermore, an LLC increases your credibility. While it is true that sole proprietors who are doing business out of their house have become more popular and people have come to trust them, being a business owner can have a tremendous impact on how various companies see you.
Transitioning from a sole proprietor to an LLC
The fact that the business registration procedure is different from one state to another is true, however, here are some things that you may have to do, regardless of your location.
For states that support online registration, you will have to create an account on the business registration center website of your state/county. As a word of caution, you will have to be patient for this one, as these sites are administered by the government and can be a little slow. Moving on, you will be asked for various general information, such as your name, address, phone number, etc., and also to run a search using your chosen business number in order to make sure that it isn’t already taken.
Considering the fact that you are creating an official business, you will also have to register for a federal employer ID. This must be done regardless of the fact the fact that you have employees or not. Its function is somewhat similar to that of a Social Security number, but for businesses. You will also have to submit your articles of organization, which are in fact summaries of the information that you entered during the first section of the process.
You will then have to pay a tax and then wait for the result. If everything is in order, you will be notified that your LLC has been approved. You can call yourself a business owner from now on.
A requirement that is a little on the strange side, which you may encounter in some states, is having a “sales and use tax” account. Even businesses that do not actually provide any physical products or any services may be required to fill out the information with the Dept. of Revenue, and the institution will then decide if the company needs a tax account or not. Again, this depends on where you’re located and on whether you are required to charge sales tax or not.
Moving to an LLC will also mean that you have to submit an annual report, and a yearly fee, to the state. This report contains general information such as the owner of the business, the registered agent, the organizer, etc. Also, you may be able to fill an online form and be done with it in an hour or so. It’s nothing complicated, but it must be done.
Most people who decide to go from a sole proprietor to an LLC do so hope that it will help their business generate more profit. For the most part, this is indeed the case, however, you also have to consider the fact that an LLC is a bit harder to manage. As your revenue increases, you may find yourself needing to hire someone who will assist you, and in order to do this, you will need to find a company that provides secure payroll services.
What changes occur when you make the transition from sole proprietor to an LLC?
With the exception that you may have to hire someone to help you with the business, there are not a lot of changes that take place when moving to an LLC. You will find that you’ll be doing most of the things in the same way that you have in the past.
Generally speaking, the biggest change is related to how both you, as well as the state think about your money. The line between what is yours and what belongs to your business will become clearer. This will prove extremely useful when you have to take business tax deductions, and will also be helpful when you have to manage your finances. The fact that you will have separate bank accounts will help you better organized the money that you spend.
Another difference that you may notice will be in how you look at your work. Once you move to an LLC, what you do in order to make a living will become more official, to both you, as well as anyone else with whom you interact. You will no longer look at your business as a hobby.
This having been said, most of the differences will be in terms of perception. While the fact that the separation between personal assets and business ones is invaluable, you could do the same thing on your own, simply by being extremely organized. Being a business owner is much more professional than simply being someone who works from home, and this means that brands and other companies will be much more likely to work with you and to respond well to your business proposals.
Depending on your line of work, this advantage may help you develop your business in ways that you wouldn’t be able otherwise.
Now, in terms of responsibilities that you will have, you will still have to fill out the forms to be taxed according to your preference (you can opt to be taxed as an individual, case in which nothing much will change, and you will still have to fill out a Schedule C and Schedule SE). Also, you will still have to send in quarterly tax payments, just like you did before making the transition. Other than this, your finances will be officially separated. This does not have an impact on how you actually run your business, the only thing that it changes is the way to handle your income and spendings.
You may never need the financial protection offered by this separation (in court, for example), but it is always good to have it.
Again, the procedure for moving to an LLC is different from one place to another, across the US. Each state has its own laws and regulations when it comes to making this change. Be sure to look at the information that government websites have to offer.
Also, don’t feel forced to move to an LLC. This is your decision, and you should choose according to your needs.