Sole Proprietorships are easy to establish and maintain, but there may come a time when you need to change business structures to an LLC. Forming an LLC offers many benefits that a Sole Proprietorship does not, such as legal protection, but it does require a bit more money and work. In this article, we offer a step-by-step process to switch from a sole prop to an LLC.
Benefits of Forming An LLC
The Limited Liability Company (LLC), despite it being one of the newest business structures, has become very popular. Forming an LLC offers the members (owners) several key benefits.
- They provide legal protection. With an LLC, a business owner typically has personal liability protection because the LLC is its own entity.
- They have tax options. LLCs can choose how they want to be taxed.
- They enable more funding options. As an LLC, you can procure bank loans, lines of credit, and even the occasional investment from angel investors.
How To Change From A Sole Proprietorship To an LLC
Starting an LLC is rather simple and inexpensive to do. Most states do not charge more than $100. Here are the seven steps you will take to form your LLC.
Step 1: Choose A Name For Your LLC
If you currently operate as a DBA, that name may not be available as an LLC. You will need to conduct some research with your Secretary of State's office to determine if the name you want is available.
Once you check with the Secretary of State's office, go to the United States Patent and Trademark Office’s database and search for the name your want to use. This will ensure that you chose a unique business name, should you want to pursue a trademark in the future.
Step 2: Designate A Registered Agent
A designated agent is a person or company responsible for accepting any communication or documentation from the state or other legal authorities. You can be your own registered agent, but the address of registered agents is public information.
Many business owners do not want their home address made available to the public, so they hire a lawyer or another firm to act as the registered agent. Plus, if you are your own registered agent, you must be available during normal business hours – every business day of the year – or risk the ramifications of missing a legal service.
Step 3: File Your Articles of Organization
The Articles of Organization, sometimes referred to as a Certificate of Organization or Certificate of Formation, is a document that contains all the pertinent information for your business.
It tells what the business name is, who the registered agent is, who the organizers are (founders), and more. This is the document you file to register your LLC with your state.
Step 4: Create An LLC Operating Agreement
An LLC Operating Agreement is a legal document that details the ownership of the business, how the business will be managed, the duties of each member (owner), and more. An operating agreement is not required, but it makes running an LLC smoother – especially if there is more than one person involved.
Step 5: Apply For An EIN With The IRS
Once you file your Articles of Organization, you will need to apply for a new Employer Identification Number (EIN) with the IRS. It is essentially and social security number for a business. This is free and easy to do. You will need your new EIN to properly operate as an LLC.
Step 6: Update Your Bank Account Or Open A New One
Once you have your EIN from the IRS, you will need a business bank account. In many cases, your bank will have you open a new business account for the LLC, even if you had a business account for your sole proprietorship.
Some banks may keep the same account as long as the business information is changed. If you do need to open another account, be sure to close the old one once all pending transactions have been processed.
Step 7: Apply For Licenses and Permits
The final step you need to take before conducting business is to apply for business licenses and permits relevant to your field. If you already have business insurance, your insurance provider may be able to change your policy into the name of your LLC. If not, you'll need to apply for another policy under the LLC. Similarly, you will likely need to file for a new business permit and license so it's in the name of the LLC.
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