If you have a sole proprietorship and are wondering whether you can switch to an LLC, the answer is simple: You can!
In this complete guide, I will tell you Why sole proprietorship is the most common business structure in the United States, What are the benefits of converting a sole proprietorship to an LLC, and How you can change a Sole Proprietorship to an LLC.
A Comprehensive Guide to Change a Sole Proprietorship to an LLC (2022)
- 1 Why a Sole proprietorship is the most common business structure in the United States?
- 2 Why Change a Sole Proprietorship to an LLC?
- 3 How to Change from Sole proprietor to LLC
- 4 Another Option
- 5 Conclusion
Why a Sole proprietorship is the most common business structure in the United States?
Sole proprietorships are incredibly common in the United States, representing 73 percent of all U.S. businesses.
A sole proprietorship is the most common U.S. business structure because it is a default business structure. For example, when individuals start a business, they do not need to file any formation paperwork with the state.
At the same time, sole proprietorship offers numerous benefits to new businesses, such as simplified business ownership, less paperwork, ease of dissolution, high privacy, and a more straightforward tax setup.
Why Change a Sole Proprietorship to an LLC?
Most entrepreneurs choose to operate as a sole proprietorship when starting a business.
But when a sole proprietorship business owner sees their businesses grow, they often decide to change their business structure from a sole proprietorship to a limited liability company to enjoy numerous unparallel LLC benefits.
A Limited Liability Company (LLC) is the most popular and recommended business structure for small businesses because of its numerous benefits such as ease of formation, limited liability, separate legal entity, and various tax benefits.
How to Change from Sole proprietor to LLC
Changing a sole proprietorship to an LLC is not very complicated.
All States have their own laws governing business entities, so you have to follow your state’s guidelines for converting a sole proprietorship into an LLC.
Generally, You will have to deal with the same paperwork in converting a sole proprietorship to an LLC that you do when creating an LLC.
Here are the steps you have to follow to change a sole proprietorship to an LLC:
- Check your Business Name Availablity in your State
- Appoint a Registered Agent
- File your Certificate of Formation
- Draft an Operating Agreement
- Get your EIN
- Apply for Business Licenses and Permits
Check your Business Name Availablity in your State
I will explain this to you with the help of an example; Henry runs an eCommerce business named Minancy in Wyoming state and wants to form an LLC for his business.
Henry needs to make sure there is not already a business named Minancy registered in Wyoming. To check your business name availability, you have to contact your state’s secretary of state office or search the database on their website (if your state has one).
Appoint a Registered Agent
The next step in forming an LLC is to appoint a registered agent. A registered agent is also known as a statutory agent or resident agent.
A registered agent is a person or a company who sends and receives legal papers on behalf of your LLC. These legal papers include official correspondence like legal summons and filing documents.
Your registered agent must be a state resident where you want to start your LLC. If your registered agent is an individual, he will be a member of your LLC and you.
File your Certificate of Formation
The next step you have to do is to file the formation documents with your Secretary of State. These documents are known by various names, most commonly this document known as Certificate of Formation. It describes the organizational structure of your business.
Draft an Operating Agreement
An LLC operating agreement is a legally binding business document that entails the ownership of its members, how the company is managed, and the structure of the LLC or limited liability company.
It can provide details such as one meeting being held naming a registered agent, selecting managers, and adding and dropping members.
An operating agreement is not required in every state, but it is highly recommended to have an operating agreement to avoid internal disagreements between LLC members.
Get your EIN
The final step is to get your Employer Identification Number (EIN), also called a Federal Tax Identification Number.
An EIN is the business’s tax identification number, like a Social Security Number for individuals.
What are the Purposes of EIN?
- An EIN is necessary for your business tax purposes.
- It is also required to open a business bank account in the United States.
- It is also needed when you want to hire employees legally.
Applying for an EIN is quite simple and free of cost. You can quickly obtain this by visiting the IRS.gov website.
You’ve come to the right place if you’re thinking about forming your LLC with the help of a professional incorporation service.
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I hope you have found a lot of information about changing a sole proprietorship to an LLC in this guide so far, but you may be wondering what comes next.
You can choose to pay taxes as a sole proprietor and still fill out the same forms (Schedule C and the Schedule SE), just as you did when you were a sole proprietor.
Alternatively, you can get the help of a CPA to find if there is a better tax plan now that you are an LLC; you have even more opportunities than you did as a sole proprietor. (Recommended)