The pros and cons of each business structureIf you first started your business on the side while keeping a full-time job, or you performed freelance work that didn’t require much liability protection, a sole proprietorship likely suited your needs. Show
But as a business grows, so too does the need to keep your business and personal finances and affairs separate. Transitioning to an LLC is often a natural progression because an LLC can limit your level of personal liability should your business ever be on the hook for a sum of money. Before we jump into the process of transitioning from a sole proprietorship to an LLC, let’s take a look at how the two business structures differ. Sole proprietorship
Limited Liability Company (LLC)
Further reading: Sole Props vs. LLCs (Main Differences) How to transition a sole proprietorship to an LLCTransitioning your business’s legal structure from a sole proprietorship to a limited liability company will take some time. When you’re ready to go through the process, use this checklist to work through each step. Step 1: Consider professional assistanceThere are many moving parts required to establish an LLC, so you may want to get some assistance. If you do want help, there are online legal services you can sign up for, or you can hire an attorney. An online service will guide you through the setup process, and it’s the less expensive option. Alternatively, hiring an attorney will give you more specialized assistance, but it will cost you. Step 2: Choose a name for your LLCWhile LLC name requirements vary by state, all states require that the business name reflects the LLC status. Choose a name that includes ‘Limited Liability Company,’ or an abbreviation of it (LLC). Step 3: Designate a registered agentYour registered agent will be the LLC’s main point of contact for communicating with the state and other legal authorities. You can choose to function as your own agent or designate your attorney to take on this role. Step 4: File the articles of organizationAn LLC’s articles of organization include pertinent information about your business, including business name, address, registered agent, the names of members, and more. Step 5: Register with the IRSWhen it comes to taxes, an LLC can be treated as either a corporation, partnership, or as a disregarded entity (income is included on the owner’s individual tax return). You can stick with the default IRS classification or elect a different option using Form 8832. Step 6: Re-apply for licenses for your new LLC structureRegulations for business licenses vary by state, industry, and locality. The Small Business Association Licenses and Permits Tool can help you determine what you need. Step 7: Talk to your insurance companyYou’ll need to get in touch with your insurance provider and notify them that your business structure is changing. They can also advise you on whether you’ll need to purchase a new business insurance policy. Step 8: Update your bank information or open a new accountIn many cases, you’ll need to open a new business bank account for the LLC, but at the very least, you’ll need to update your business bank information to reflect your new LLC status. If you do open a new account, be sure to close the old one (after all checks and purchases have gone through). While you’re waiting for those payments to clear, stop using the account and change the banking information for any automatic payments that you make. Also, be sure to inform clients of your new business name so that they can issue payments to your LLC. Further reading: Form 8832 and Changing Your LLC Tax Status This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein. |