Any business that doesn’t deliberately choose a business structure launches by default as a sole proprietorship (or a partnership, if it has partners). But sometimes down the road, needs change, and the business starts to consider a different structure to protect itself.
If this describes your business, read on. I’ll tell you how to easily convert your existing sole proprietorship into an LLC.
But First, Why Switch?
There are several reasons to move from a sole proprietorship to an LLC, including:
- What started out as a hobby has become a veritable business, and you want to protect it
- You don’t want your personal assets to be at risk
- You want to take advantage of pass-through taxation and other tax benefits
- Your client or investor requires you to be an LLC
Step 1: See if Your Name is Available
Just because you’ve been operating as “Beth’s Bonnets” for years doesn’t mean that name is necessarily available in the state where you want to form an LLC. That’s why you need to conduct a corporate name search to make sure it’s available for your new LLC. If the name you want isn’t available, you might have to slightly modify it.
Step 2: File Your Articles of Organization
Once you’ve made sure your name is available in your state, you’ll need to file your Articles of Organization forms. These usually can be found on your state’s Secretary of State website, or you can hire CorpNet to file them for you. In this simple document, you will be required to fill out information on:
- Name and address of your business
- The purpose of your LLC
- Name and address of your registered agent
- Whether your LLC will be member-managed or manager-managed
Step 3: Create Your LLC Operating Agreement
Next on the list is your operating agreement. Some — but not all — states require this document, which lists your LLC’s managers and owners, as well as how much of the company each owner has, voting rights, and how profits and losses are distributed. You should also address what happens when someone wants to leave the business.
You can have the CorpNet team assist you with a template or customized version.
Step 4: Apply for an EIN
Even if you had an employer identification number as a sole proprietor, you’ll need a new one for your new LLC.
Step 5: Open a New Business Bank Account
Once your LLC paperwork is approved and you have your new EIN, head to your bank to open a new account. You won’t be able to use your old business checking account with your new business structure, so you’ll also need to order new debit and credit cards, as well as checks.
Step 6: See if You Need to Reapply for Business Licenses
Some states require you to reapply for business permits or licenses once you have your new LLC formed, so check with your state and city to see if that’s the case.
Step 7: Reconsider Your Tax Strategy
As an LLC, you have the option to be taxed as an individual and still fill out the Schedule C and Schedule SE like you did as a sole proprietor. It’s a good idea to check with your tax advisor to see if there’s a better tax strategy for your new LLC.
Step 8: Stay on Top of Renewals
Most states require you to file an Annual or Biennial Report to keep your LLC in good standing, so make sure you know when that form is due and what the filing fees are.
Ready to take the plunge from sole proprietor to LLC? Let CorpNet help! Download our free How to Form an LLC Guide to get started.