When You Convert Your Sole Proprietorship To An Llc You Formalize The Business And Enjoy Limited Liability
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To convert a sole proprietorship to a limited liability company , you’ll file the same paperwork as you would if you had created the LLC from scratch. You’ll also update sole proprietorship registrations , bank accounts, and contracts to reflect the change. Becoming an LLC offers you a number of benefits, including protecting your personal assets from the debts of the business and adding credibility to your business by communicating to vendors and customers that you own a formally registered company. However, an LLC is not an option for every company, and converting to that structure might mean you will pay more taxes and fees than had you stayed a sole proprietorship.
S Corp Tax Implications
Filing business taxes as an S corp has some advantages to business owners. If you form a corporation, the election effectively eliminates the double taxation that affects C corporations profit distributions to S corp shareholders aren’t treated as taxable dividends, because S corp shareholders report their respective shares of business profits on their own returns and taxes are only paid once. Another benefit is that a shareholder doesn’t have to pay self-employment tax on his entire share of profits as sole proprietors and partners do. Instead, if you pay yourself a reasonable salary, you’ll only owe self-employment tax on those wages, but not on profit distributions.
Converting A Sole Proprietorship Or Llp To A Private Limited Company In Singapore
The sole proprietorship or LLP is a completely separate legal form from a company and the law does not provide any process for conversion from one form to the other. Instead,what you will need to do is:
- Incorporate a new company. At the point of incorporating the company, you have to indicate that the company is going to take over the business of the sole proprietorship or LLP. You must indicate the date of termination of the business .
- Transfer the business matters over to the newly incorporated private company from the old entity.
- Terminate the sole proprietorship or LLP and inform the Company Registrar that you have ceased to carry on business as a sole proprietorship or LLP.
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How To Change From A Sole Proprietorship To A Corporation
We are often asked how to make the change from Sole Proprietorship to an Incorporated company.
First, congratulations. Your business has most likely grown or changed to a point where creating an incorporated company is a potentially better option for moving your business forward. Your current Sole Proprietorship registration would have a Master Business Licence issued by the Province of Ontario. When you incorporate your business, you will receive Articles of Incorporation for the new business entity.
There are a few reasons people decide to change their existing businesses from a Sole Proprietor or business license to an incorporated company.
Why You Should Turn Your Sole Proprietorship Into An Llc
Youve probably heard it again and again for as long as youve had your small business: You should form an LLC. Its common advicebut is it really the right move for your business?
Most small businesses start as sole proprietorshipsits the most common form of business in the United States. Many of these businesses do eventually take the extra step of registering with the state and becoming an incorporated business like an LLC, but is it worth it? What is there to gain ?
To know if transitioning to an LLC is right for you, its important to understand exactly what it means to be a sole proprietorand how LLCs are different in the eyes of the law, the IRS, and the bank.
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What Is A Limited Liability Company
A limited liability company is a simple business structure that can be used as protection from personal liability for expenses arising from your business operations. Currently, all 50 states allow sole proprietors to organize as LLCs.
The concept of the LLC statute is that the owner does not have any liability for business debts because they are a member or owner of the business. In other words, the owner or member has their personal assets separate so they are protected from claims arising out of the normal business operations. With this, it is understood that the protection of the LLC does not relieve the member of responsibility for their personal actions, nor will it protect them from and personal debts.
Can I Turn My Sole Proprietorship To An Llc
If you wish to change a sole proprietorship to LLC it is possible. No state prohibits you from making this change and you dont need to start a new business to do it.
You will be happy to know that the process is almost the same as incorporating an LLC from the start. Remember that a sole proprietorship is not considered to be a type of formal business.
Think of the conversion process as a type of formalization of your business activities.
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A Sole Proprietorship Isnt A Legal Entityso What Is It
Its you. When you have a sole proprietorship, you and your business arent legally distinct entities. Essentially, you are your business.
The good news is that you get all the power and all the profits. You can make all the decisions and reap all the rewards. The bad news is that you also get all the risk, all the responsibility, and all the losses.
When Your Business Becomes Incorporated
Your legal status can change in one of the following ways:
- from sole proprietorship to corporation
- from partnership to corporation
When you change your legal status to incorporate an existing business, you need to do the following:
You must contact the appropriate incorporating authority and register a new corporation, even though you already have an existing BN.
If you are incorporating with Innovation, Science and Economic Development Canada or one of the provincial incorporating authorities listed on Canada Revenue Agency registration and other provincial or federal programs, the following will apply:
- a new BN will automatically be registered with the CRA for your new corporation
- a new Corporate Income Tax program account will automatically be associated to the new BN
- skip step 2 and go to step 3
Once your incorporating authority has provided you with your new incorporation information contact the CRA at 1-800-959-5525 to register a new BN. A new RC program account will automatically be associated to the new BN. During the same phone call, follow step 3.
Once the new BN has been registered with the CRA, any program accounts that are associated to your old BN, such as GST/HST program account or payroll program account will not be automatically associated to the new BN.
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How Setting Up An Llc Can Help
When you set up an LLC with my help, you can do the following:
- Limit liability
- Manage your business more easily
- Enjoy pass-through taxation, or pay taxes on your personal tax returns, avoiding problems with double taxation
- Enjoy added privacy, if you incorporate in Wyoming
- Hold appreciating assets without worries such as real estate, intellectual property, or stock portfolios
- Allocate profits and losses to LLC member in varying amounts
When you contact me at , I can give you further details about converting a sole proprietor to LLC in California. I know all the details about making this type of transition.
Therefore, you can be assured that you will enjoy enhanced benefits when you make this type of change.
Is It Time To Make A Change
If your business is growing, you want to take on partners, or youre looking to protect yourself from risk to your personal assets, it may be time to convert your sole proprietorship to an LLC.
Follow the guidelines for your state on forming an LLC. If you have any questions regarding the process or need help, consult an attorney.
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How To Switch To An Llc
Generally, most sole proprietors are allowed to change to an LLC. However, some states require certain licensed professionals to organize as different types of entities. Whenever considering a change to legal structure, business owners should make sure they know their states restrictions and requirements.
That said, the process for changing from a sole proprietorship to an LLC is fairly similar in all states. Below, Ive listed the typical steps. Keep in mind that there are nuances from state to state, so its mission-critical that sole proprietors research what they must do to legally make the switch.
Changing Your Business Entity Type
When the nature of your business changes, it may present a chance for you to change from one business entity type to another:
- Changing a corporation into a limited liability company . For example, a C corporation with an owner that is not a US citizen wish to become an LLC to take advantage of pass-through taxation.
- Changing an LLC to a corporation. For example, the owners of an LLC may wish to seek venture capital funding and therefore wish to become a corporation.
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How Long Does It Take To Convert A Sole Proprietorship To Llc
The process can take just a few days, or it can take up to a month. It depends on factors like the state, the time of year, and whether you have appropriate representation.
I recommend making sure you have a business lawyer on your side, such as myself, to make sure there are no mistakes and that the process gets completed as soon as possible.
Dissolving your sole proprietorship and forming a new LLC can be done in as little as 3-5 business days with the right representation.
You need to decide whether its worth the stress and the hassle of trying to do it yourself to save a few dollars.
When Is A Conversion From Sole Proprietorship To S
For any type of eligible business structure, the conversion to an S corp is official when the Internal Revenue Service approves it. Unfortunately, a sole proprietorship business isn’t eligible to directly convert to an S corp. This doesn’t mean, however, that the S corp designation is permanently out of reach: You just have an additional requirement to satisfy before the conversion can occur.
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File Your Articles Of Organization
The official form you need to send to form an LLC is known as the Articles of Organization. This is usually just a matter of laying out your businesss name and providing information about the owners.
State rules differ, but the three main pieces of information you will have to include are:
- The name of the LLC.
- The companys address.
- The names of any owners.
The average fee is around $100 to file, with some states charging more and some charging less.
Sole Proprietorship Vs Llc: Whats The Difference
It can be hard to know if changing from a sole proprietorship to an LLC is right. Take a look at these key points on each business structure to help you decide.
Sole proprietorships are
- Easy and affordable to form
- Considered the same legal entity as the owner
With a sole proprietorship, you are personally responsible for all business losses, debts, and liabilities.
Limited liability companies are
- Owned by one person or more
- Moderately easy and affordable to form
- Considered different legal entities than the owners
LLCs combine aspects of corporations and partnerships. An LLC separates business and personal liabilities, so your assets are protected and owners not liable for business debts. There is also a shared tax responsibility between members, like a partnership.
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Incorporation Is It Time
There are many things to consider when looking at switching your business from a Sole Proprietorship to a Corporation. If you decide to incorporate, the great news is that the process to switch from one to the other is pretty straightforward and easier than you think.
We have compiled a list of commonly asked questions by our clients when they reach out, considering what is involved in making the transition to an incorporated company.
More Room For Expansion
In conclusion, the structure of a private limited Singapore company is more complex than a sole proprietorship or LLP, but it offers better liability protection, usually has more room for expansion and portrays more credibility to investors. While it might cost more to start a private limited company, the ends may justify the means if you can handle the extra work and complexity of the structure.Converting a Sole Proprietorship or a LLP to a Pte Ltd company in Singapore requires careful planning and execution. It is highly recommended that you seek professional help if you plan to convert your existing Singapore business into a Pte Ltd company.
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Why You Need To Select A Registered Agent When Converting A Sole Proprietorship To An Llc In California Or Another State
Next, you need to select a registered agent if you wish to convert a sole proprietorship to an LLC in California or elsewhere. Doing so will help you receive important legal notices and tax paperwork while you form your LLC and after its creation.
A registered agent, also known as an agent for service of process, receives and conveys all the documents related to your LLC, including any communications mailed by the Secretary of States office.
You should choose a registered agent other than yourself to ensure that any time-sensitive materials are received and handled. The registered agent you choose should possess a physical address in the state the LLC is formed, and not a PO box.
Choose A Name For The Business
Youll need to choose a name for your business. It can be your name plus Contractor, Builder, or anything else, as long as it is unique. To check for other businesses that might be using the same name, check your states business registry, the Federal Trademark and Patent Office, and do an internet search for companies with the same name. Youll also want to check for domain name availability for your website.
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Can I Go From A Dba To Llc
Yes, you can. A DBA can be transferred to an LLC. Its just a matter of transferring the registration from yourself to a new business.
But what is a DBA exactly?
Some states require you to have a Doing Business As registration if your brand name is different from your official business name. Take note that not every state has this, so it may be irrelevant to you.
There is a process involved, but it is usually just a matter of filling in a form to transfer the registration. Your sole proprietorship may even have to write a letter of permission permitting the LLC to use that name.
In all cases, you will have to form the LLC before you can move forward with transferring the DBA.
In A Sole Proprietorship
Your legal status must change if all of the following are true:
- your business is not incorporated
- the number of owners of your business changes. For example, from one owner to multiple owners or from multiple owners to one owner.
When the number of owners in a sole proprietorship changes, your business legal status changes in one of the following ways:
- from sole proprietorship to partnership
- from partnership to sole proprietorship
For these legal status changes, you have to call the CRA at 1-800-959-5525.
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Selecting A Business Structure
The decision regarding business structure is a decision that a person should make, in consultation with an attorney and accountant, and taking into consideration issues regarding tax, liability, management, continuity, transferability of ownership interests, and formality of operation.
Generally, businesses are created and operated in one of the following forms:
The information on this page should not be considered a substitute for the advice and services of an attorney and tax specialist in deciding on the business structure.
File Articles Of Incorporation With Your State Government Office
The next step is to file specific paperwork, often known as Articles of Organization, with your state office. The document is straightforward and youll be required to provide information like:
- The name and address of your LLC
- Your LLCs purpose. You typically wont need to be specific here, and can even give a general answer like The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state.
- The name and address of your registered agent .
- An indication of your management: will your LLC be member-managed or manager-managed?
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Pay And Establish Reserves For Financial Obligations
Your corporation’s formation state and the other states where it is registered do not consider your LLC completely dissolved or withdrawn until it settles all outstanding tax obligations for sales tax, franchise tax, income tax, and any state-mandated employee payroll deductions. Pay these and any federal taxes to finalize the dissolution.
State law also requires a dissolving corporation to set aside funds to pay any future corporate liabilities that are known to exist, such as a pending lawsuit or an obligation to contribute to an employee retirement plan. If the exact amount of the potential liability is uncertain, the reserved funds should represent your good faith estimate of the future payment obligations.