So, you're ready to make the leap from Sole Proprietorship (SP) to establishing your business as a Limited Liability Corporation (LLC)? While figuring out how to change a sole proprietorship to an LLC may feel like a giant leap, don't panic! In truth, it can be a reasonably straightforward process.
Changing from a Sole Proprietorship (SP) company to a Limited Liability Corporation (LLC) sounds complicated. This step encourages you to" tow the line" in structuring your company and keeping track of its operation.
Ultimately, it's smart to do if you're eager to make your business more than just a part-time job. Moving from an SP to an LLC represents a graduation of sorts, a coming-into-its-own of your business. So, congratulations on wondering how to change a sole proprietorship to an LLC in the first place!
Before we tell you exactly how to change a sole proprietorship to an LLC, let's briefly examine the most notable benefit of making this change.
A significant benefit of establishing a corporation or LLC is how it helps protect your personal liability for business debts. This means if you incur any debt while running your business, creditors can't go after your personal assets to recover them. It also offers increased credibility by making it look like you are a reputable entity serious about doing business.
However, it's important to note "piercing the corporate veil" is still possible in some cases when an LLC or corporation fails to follow all legal formalities and obligations. In addition, courts may pierce the corporate veil if the owners of a company unlawfully use it as a shield for wrongful actions or unjust costs.
Small corporations and LLCs must comply with applicable legal and tax rules, avoid commingling personal and business assets, and maintain separate bank accounts to minimize this risk.
(This is also where outsourcing bookkeeping to the experts like the ones at Two Roads can be a real lifesaver!)
Another critical decision you'll have to make is cash versus accrual accounting. Read about it here.
Here are the primary requirements for an LLC and some links to websites that can also help.
The name will need to include "Limited Liability Corporation" or LLC. It should also be available to use in your state and not be confusingly similar to a name already being used.
Your articles of organization document essentially establish the name of your LLC as an official business entity. You will need to file this document with the appropriate state agency.
Here's another article you can't miss next: 4 Unusual Financial Strategies for Small Business Owners.
Now it's time to register your LLC with the IRS. This will require filing an Employer Identification Number (EIN) form, essentially like a Social Security Number for businesses. Once you receive this number, you can open a business bank account and proceed with the other steps.
With the change in status, you may need a new business insurance policy. Your coverage could be much more extensive and costly. So, it's wise to shop around and find the right policy for your LLC. However, remember even if you're spending more on insurance, this demonstrates, in part, the increased value of your business!
Ensure your business coverage considers the unique risks your business faces and the size and type of business you own.
You may need to open a new bank account for the LLC. Contact your clients with your new name so their payments will reflect the name change. And again, remember with an LLC, you must keep your personal assets separate from the business's assets.
None of this is particularly hard to do, but it will require a little effort. However, the benefits will be necessary as your business grows and prospers.
Now that you understand the benefits of switching from a sole proprietorship to an LLC and the steps necessary to do it, you are in a better position to make an empowered decision about whether or not this is the right step.
Establishing an LLC helps shield your personal assets from business debt and gives the company more credibility with customers. Just be sure to follow all legal formalities and keep personal and business assets separate. And, of course, rely on the pros at Two Roads for any bookkeeping services you need along the way.
Here are three more articles to read next:
Three Biggest Mistakes Entrepreneurs Make Trying to Save Money
6 Common Challenges for New Businesses (& How to Navigate Them)
This article was updated in 2023 just for you.