How To Convert From A Sole Prop To S Corp
If your business is operating as a sole proprietorship, and youâre a U.S. citizen or equivalent, converting to an S corporation is relatively simple.
Step 1: Establish a single-member limited liability company . This LLC will be your legal entity structure. Forming an LLC is also relatively simple, but keep in mind that every state will have its own set of rules. In general, there are three steps to creating an LLC:
Get your paperwork in order. This typically consists of your: a) Articles of Organization . This has the basic information of your LLC: its name, member , and who your registered agent is b) Operating Agreement: the document that states how the LLC is run, along with other rules, and responsibilities of the member .
Register with the secretary or state. You should name and register your business with the secretary of state where it will be domiciled. As a single-member LLC, you can use your Social Security Number for tax filings, or you can apply for an employer identification number .
Apply for licenses and permits. Depending on your business, it may be necessary to apply for licenses or permits in order to legally operate it. Check with your city and county governments to find out what requirements exist.
An attorney can help you with these items, but if your business will be pretty basic, completing them shouldnât be too difficult.
Apply For A New Bank Account
When you form an LLC, you create a new legal entity. The business has many of the same rights as a person, including being able to own property and open a bank account.
Opening a bank account under the name of the LLC helps you separate business and personal funds. A helps you protect personal assets, keep records, and report taxes.
Apply For Business Licenses And Permits
Dont forget about any of the licenses and permits that are required to legally run your business such as a professional license, resellers permit, or health department permit. Some states require that you reapply for a license when your business structure changes. You can contact your local office or a site like BusinessLicenses.com to find out about your specific licensing requirements.
Thats it. With those six basic steps, youve now formalized your business activities into a formal business structure.
If youre wondering what comes nextyou can opt to be taxed as an individual and still fill out the Schedule C and Schedule SE like you did as a sole proprietor. Or check with your CPA/tax advisor to see if theres a better tax strategy, since you now have more options as an LLC than you did as a sole prop.
Lastly, youll need to maintain your LLC, or you could end up losing your personal liability protection. Check to see what your states maintenance requirements are, as youll typically be required to file an Annual Report and pay a nominal fee.
Best of luck on your business venture, and congratulations on taking this important step toward creating a solid foundation for your new business.
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What Is A Sole Proprietorship
An individual and their business are one entity when the business is a sole proprietorship. Only one owner is allowed in a sole proprietorship. In this type of business entity, the person owns the business assets and is in charge of the registration and Employer Identification Number . There are many advantages to this, but a downside is being responsible for legal actions and lawsuits that could be potentially devastating.
There is less paperwork in a sole proprietorship, which many owners enjoy. There are also fewer regulations, and tax returns are more simple with a sole proprietorship. Many businesses that are on the smaller side start as a sole proprietorship. Single business owners who haven’t filed any formation paperwork with their state are operating as a sole proprietorship. This type of business entity is affordable and easy to form.
It’s not required by law to separate personal and business assets as a sole proprietor. However, it is recommended that personal and business finances aren’t combined. Sole proprietors aren’t required to pay unemployment tax on their income but will need to pay it if they have an employee.
Converting Your Sole Proprietorship To An Llc Step #4 Ein Number
Now you may have already filed for an EIN when you first started your business as a sole proprietorship. When you start your LLC, you actually have to apply for a new EIN number. And you’re going to use this EIN to do things like open your bank account to process your payroll if you’ve got employees or if you’re the employee that you want to process payroll for, to file your taxes and to apply for business credit. So it’s really important that you get a new EIN number when you start your LLC.
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Less Complicated To Handle
Running an llc and producing provides you a lot of the very same perks as running a corporation, but without much of the problem.
LLCs have looser requirements for meeting compliance standards. Therefore, they do not demand the exact same operation formalities as a corporation when it come to board authorization and regular conferences.
As a result of just how conveniently conformity criteria are met, maintaining LLCs in excellent legal standing is fairly basic.
Normally, with fewer rules comes much less documentation. When beginning your LLC, however, be sure to create an LLC Operating Agreement.
Doing so permits you to create distinct guidelines that govern your establishment. Otherwise, the default regulations of your state will automatically apply to as well as regulate your company.
How To Change A Sole Proprietorship To A Partnership When One Partner Is In A Different State
Converting a sole proprietorship to a partnership is a simple process. If you’ve been operating your business as a sole proprietor and are now looking to bring on a partner, you can quickly alter your business structure.
When considering a change in your business structure, a question many people have centers around the physical location of the partners. General partnerships do not require the partners to reside in the same state. As a result, your partnership may exist in any state, though there are other things to consider.
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Enjoy Potential Tax Benefits
LLCs are considered disregarded or pass-through entities, so profits are taxed under the owners individual income tax as it would be with a sole proprietorship. Though converting from sole proprietorship to LLC wont change the calculation of your income tax, it will allow you to:
- Potentially avoid tax audits. Filing your taxes as a sole proprietorship is more likely toraise red flags with the IRS, so filing as an LLC could save you many hassles and headaches.
- Reduce self-employment tax. As a sole proprietor or owner of an LLC thats taxed as a disregarded entity, you must payself-employment tax on your companys entire earnings. However, LLC owners may choose for their business to be treated as an S corporation to reduce their tax burden. As an employee of the S corporation, you would only owe self-employment tax on the salary you pay yourself instead of the entire business profits.
Change From Sole Proprietorship To Llc: Everything You Need To Know
To change from a sole proprietorship to an LLC, also known as a limited liability company, is almost like starting an entirely new business. 3 min read
To change from a sole proprietorship to an LLC, also known as a limited liability company, is almost like starting an entirely new business. You might have to change your business name, and you’ll be required to file documents and pay fees that you probably didn’t have to worry about before. It can be beneficial to make the change, especially in terms of legally protecting your personal assets.
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Converting Your Sole Proprietorship To An Llc Step #6 Business License And Permits
Number six is that you’re going to need to reapply for your business license and permits. So, for example, in North Carolina, where I practice law, you actually have to have what’s called a privileged license. I actually just got it in the mail the other day.
They want me to re-up it. And sometimes, if you were to switch to a new business or new LLC, you may need to reapply for some of those local permits and licenses. I know when I practiced here in Orlando as well, there were local permits that we had to have to practice law or to operate a business. And so those are going to vary from state to state and city to city and county to county. So you’re going to want to check with all your local authorities to make sure that you’ve got all the right permits and licenses in place to operate your business.
Update Your Licenses Permits And Ein
Its especially important to be aware of the rules surrounding construction licenses and permits in your industry and area when you convert to an LLC, since you may need to reapply when your business structure changes.
Additionally, dont forget to apply fora new Employer Identification Number with the IRS, even if you already have one. This will be essential for filing taxes and handling payroll, opening business bank accounts and obtaining credit for your business.
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Converting Your Sole Proprietorship To An Llc Step #1 Business Name
All right. Step number one, make sure your business name is available. This is a biggie that a lot of people miss. Now, you may have already filed a DBA in your state. And if you did good for you because you’re knowing your name is already available. But if you have not filed a DBA in your state, then you need to do some research and make sure that the name that you want to use for your LLC is actually available. Because if it’s not, you’re going to waste a lot of time and money filing those articles of organization just to find out that they’re going to get rejected because the names aren’t available. And chances are they don’t like to refund those filing fees, which can be hefty in some states.
Now, if you are actually switching your DBA to an LLC, you want to make sure to amend that DBA as well to reflect the fact that the DBA is now the name of the LLC. And that might include withdrawing the DBA and just filing your LLC, or your state may have some other paperwork that they want you to file for that. If you want to hire my firm to file your LLC for you, we’ll include the name search free of charge.
Transfer Corporate Assets And Liabilities To Yourself
Your corporation is the legal owner of your business assets. This includes land, buildings, equipment, inventory, supplies, trademarks, customer contracts, cash-on-hand, and accounts receivable. It is also the legal owner of your business liabilities, including real estate leases, vendor contracts, software licenses, bank and credit card debt, and taxes. Since the sole proprietorship will be owned by you directly, everything owned in the corporation’s name must be transferred to you as part of the company’s liquidation.
This sounds simple, but the details are often complicated. For example, any real estate owned by the corporation can only be transferred to you in a formal closing that involves the filing of a deed, a refinance or payoff of the mortgage, and buying a title insurance policy. Any bank loan or contract that the corporation signed cannot be assigned to you without the bank’s or the other contract party’s consent. Oftentimes in business, changing needs and trends make scaling back a wise option. Converting a corporation to a sole proprietorship can be a complicated process.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.
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Should I Form An Llc Or Sole Proprietorship
Depending on your business, it will be beneficial to create either an LLC or a sole proprietorship. A sole proprietorship is best suited to small businesses with low risk and low profits. The business will not have a wide range of customers but rather a small, dedicated group. Sole proprietorships usually start as hobbies and become a form of business. The reasons to start an LLC would be the opposite of the reasons above. The business is associated with some risks, the possibility for very large profits, a large customer base, and in a position to benefit from certain tax structures.
Protect Your Personal Assets From Liability
As a sole proprietor, there is no legal distinction between you and your business. If someone is injured on the job, comes after your business for unpaid debt, or sues you for damage to property, youre personally liable. The suing party can go after your home, vehicles, jewelry, your kids college fund and more. You never want to find yourself in this position, especially as you take on the risk of larger, more complicated projects.
When you form an LLC, it separates you from your business by legally classifying it as a separate entity, protecting your personal assets from any liability and debt your business may incur. This is critical to ensure the security of your personal wealth, both for yourself and your family.
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Understanding A Sole Proprietorship
A sole proprietorship is very different from a corporation , a limited liability company , or a limited liability partnership , in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.
For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of the sole proprietorship are also the profits of the owner, as all profits flow directly to the business’s owner.
Documents Required For Online Registration Of The Company
In India, Private Limited company registration cannot be done without proper identity proof and address proof. Identity and address proof will be needed for all the directors and the shareholders of the company to be incorporated. Listed below are the documents that are accepted by MCA for the online company registration process acceptable.
Identity And Address Proof
- Scanned copy of PAN Card or Passport
- Scanned copy of Voters ID/Passport/Drivers License
- Scanned copy of the latest bank statement/telephone or mobile bill/electricity or gas bill.
- Scanned passport-sized photograph specimen signature
For the foreign nationals, an apostilled or notarized copy of the passport has to be submitted mandatorily. All documents submitted should be valid. The residence proof documents like the bank statement or the electricity bill must be less than 2 months old.
Registered Office Proof
For online company registration in India, the company must have a registered office in India. To prove admittance to the registered office, a recent copy of an electricity bill or the property tax receipt or water bill must be submitted. Along with the rental agreement, utility bill or the sale deed and a letter from the landlord with her/his consent to use the office as a registered office of the company should be submitted.
E-Form spice 32
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How To Change From Sole Proprietorship To An Llc
Don’t forget that when you are a sole proprietorship rather than an LLC, you are the same entity as your business. If you choose to convert to an LLC, the first thing you may need is a name that meets the following criteria:
- Your business name must be different than your own name.
- Your business name must be unique and not registered to another business in the state. Even if you were already using the name for your sole proprietorship, you might need to change it in order to register as an LLC.
- You can check your business name’s availability with your state’s office of the Secretary of State. Check to see if your state hosts an online database that you can search for information about existing LLC names.
If you’re having trouble creating a name that meets this criteria, you can consult with an attorney. Make sure to check for trademarks as well. The United States Patent and Trademark Office keeps a database of trademarked names. Make sure the phrase “LLC” or “limited liability company” is included in your company name. Generally, registration of your LLC name is taken care of for you when you form the LLC.
When you fill out the official paperwork of your state, check the local requirements for your articles of organization, since every state is slightly different. Articles of organization tell the state important details about your company, such as your name, contact details, and the owner structure.
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How To Register A Company Online
Company Registration in India will boost the progress of startups and provide an additional edge over those who have not registered. The Ministry of Corporate Affairs governs the company registration process with rules and regulations framed in accordance with the law.
Conditions to be followed prior converting a sole proprietorship to private limited company
- After incorporating a new private limited company, all the assets and liabilities of the old sole proprietorship will be completely transferred to the company.
- Even after the conversion takes place, the old sole proprietorship will hold 50% of shares in a new private limited company. i.e 50% of the voting rights will be held by a sole proprietorship.
- The old sole proprietor will hold shares for a minimum period of 5 years from the date of incorporation of a new private limited company.
- Similarly, there will not be any monetary consideration between a sole proprietorship and private limited company as it is a mere conversion, not sale.
Step by step procedure for registration
- Step 1: Application for DSC .
- Step 2: Apply for the DIN
- Step 3: Application for the name availability.
- Step 4: Filing of the EMOA and EAOA to register a private limited company
- Step 5: Apply for the PAN and TAN of the company
- Step 6: Issued certificate of incorporation by RoC with PAN and TAN
- Step 7: Opening a current bank account on the company name
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