Businesses have a plethora of options when it comes to organization. Among the most popular ones are sole proprietorships and limited liability companies (LLCs).
A sole proprietorship is a business owned by a single individual. They're responsible for paying income tax on business revenue and making all decisions. Sole proprietorships are unincorporated, meaning the owner has total liability.
Ideally, that means that if they have a debt, their assets can act as security for the loan. In many cases, sole traders do business with their names because it seems unnecessary to do it under a separate one.
A sole proprietorship is one of the simplest forms of business to operate. This is because of its flexibility and looser compliance requirements. You may, however, want to change your business to an LLC at some point, especially one you've been planning to expand.
What Makes An LLC Different?
This business structure combines the characteristics of a corporation and a partnership. Owners get limited liability, meaning their assets become separate from the business. If ever you end up defaulting on a loan payment, your personal property won't be auctioned. This helps protect your assets, leaving the debts themselves in the hand of the firm.
These features may seem advantageous for you as your business reaches a certain scope and size. If you’re planning to switch, you need to assess your level of preparedness for taking on the new benefits and responsibilities you’ll get.
For that, you can always work with professionals. Agent reviews allow you to know where you are in terms of your business, determining just how ready it is to make big decisions like switching structures. You can get a Northwest Registered Agent review or the same service from a similar provider in your area to get started. They offer not only registered agent services but also assistance with LLC formation. Feel free to ask questions about the process.
What Are The Steps In Switching To An LLC?
If you’re planning to transition your sole proprietorship into an LLC, these are the steps you’ll usually take:
1. Verify The Name That You Choose
When transitioning from a sole proprietorship to an LLC, you have to ensure your business name is unique. You may often find other companies using the concept for your prospective name. Furthermore, just because you've been using a particular name as a sole trader doesn't mean you'll find it available as an LLC name. So, it’s always best to check registers before you settle on one.
Trademarking is the way to go to secure a name, phrase, graphic, or concept as your own. Check with the United States Patent and Trademark Office (USTPO) to see if your prospective trademark isn't similar to other businesses. This should save you a lot of trouble from litigation over trademark infringements.
Why is the name important? First of all, it’s the main identifier for your enterprise in the market. You’re also legally required to include the phrase ‘Limited Liability Company’ in your business name once you've made the switch. To keep things tidy, you can always use common abbreviations like Ltd Co, LLC, and Ltd. This ensures commercial and regulatory bodies, as well as your clients, know how you operate.
2. File An Articles Of Organization Form
Once you’ve found a unique company name, the next step is to file a document called the certificate of organization, also known as the articles of organization form. This form indicates the specific details of your new LLC, which include:
- Its name and address
- The purpose of its formation
- The registered agent's name and address
- Its management structure
- The person responsible for taking care of all legal matters like receiving legal papers
- The company owner's name and address
- The application date
Ideally, the certificate of organization gives a full business description of your company. Depending on the state where you operate, you'll also be charged a particular amount when submitting the document. The fee ranges from about USD$40 to USD$3,000. However, the filing fee that most states charge is approximately USD$100.
Note that the article of organization differs from the articles of association and incorporation. The former states the company's purpose and regulations for its operation. Meanwhile, articles of incorporation are the forms you need to register a corporation officially. Avoid getting confused by these terms to avoid hassles during filing.
3. Develop An LLC Operating Agreement
After you've completed the articles of organization, the next step is to create an operating agreement. This is an outline shared by the members of the LLC which lays down the rules and regulations they have to follow. This document must indicate the following:
- The obligations and rights of the members
- Profit and loss distribution
- How to exit the company
- Non-competing amenities and provisions for members
- Matters to do with retirement
- Voting power
The essence of the operating agreement is to reduce the risk of conflict between firm members. It'll be easier for the company to operate seamlessly when all members are on-board with what is expected of them and what they get in return.
Submitting this operating agreement to any legal or government organization isn't mandatory. That doesn’t mean you can go without it. You only need to ensure that all members adhere to all the terms.
4. Open A New Bank Account
Now that you've switched from a sole proprietorship to an LLC, you should avoid using your previous business structure’s bank account. The main reason is that your assets will be separate from your business. This way, you can do the following with ease:
- Filing and reporting accurate taxes
- Keeping records of business transactions
5. Obtain An Employer Identification Number
You need to apply for an Employer Identification Number with the Internal Revenue Service (IRS) regardless of whether you previously had it. The EIN is essential for reporting and tax filing purposes. Aside from that, the IRS requires that you apply for an EIN if more than one person owns your company. This keeps all LLC members accounted for when it comes to their obligations.
6. Upgrade Your License And Business Permit
Finally, you must update your business license and permit to accurately reflect your status as an LLC. You can always try registering additional permits and licenses for your company. Consult an attorney specializing in business and taxation laws to help you make the right choices.
Make The Transition Successful
In light of ever-changing challenges, business owners must be willing to take big steps to keep their enterprises going. This is just a sample of the possibilities your sole proprietorship has in store.
The key is to stay in line with regulations for converting your business into an LLC. That way, you can focus on doing what you can to continue taking your ideas and services to greater heights. Reach out to experts to learn more about this process.