How Do You Start A Sole Proprietorship
To start a sole proprietorship you need to for the most part just start your business. It does not require registering with your state. It is recommended to come up with a company name and then apply for a permit or license with your city and state if needed. If you plan to hire employees then you will need an employee identification number from the IRS and if you are going to sell taxable products you will need to register with your state.
Tax Advantages To S Corps
There are a few tax advantages to converting to an S corporation.
First, because the owner of an S corp is required to pay themselves a âreasonable salary,â the business can deduct this expense for bookkeeping and tax purposes.
Likewise, an S corp must withhold and pay its share of FICA payroll taxes. Those are deductible expenses, too. Those expenses reduce your S corpâs overall profit, which, in turn, reduces its ownerâs taxable income. Pretty great, right?
Whatâs even better is that by converting to an S corp, a business owner can avoid the 15.3% self-employment tax. Your sole prop, even if itâs organized as an LLC, canât do that.
Have A Plan For Maintaining Your Llcs Compliance
All LLCs have ongoing responsibilities to stay compliant with their states rules. Those rules can vary from one state to the next.
Examples of Possible Ongoing Compliance Responsibilities
- Filing annual reports
- Reporting and paying taxes
- Renewing business licenses and permits
- Maintaining a registered agent
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When Should I Turn My Sole Proprietorship Into An Llc
As your business grows, the liability protection an LLC provides is going to be an important consideration for you. Deciding when to turn your sole proprietorship into an LLC is really a personal choice, but if you are committed to running a business full time and you are confident in your future income potential as a business owner, you should not wait to form an LLC.
Forming your LLC today can help you take advantage of potential tax benefits and enjoy the peace of mind of limited liability protection.
Moving From Sole Proprietor To Llc
1. Research to Make Sure Your Business Name is Available in Your State
Lets say that Jane wants to form an LLC for her business, Janes Candies. She needs to make sure that there already isnt another business called Janes Candies registered in her state. To check the availability of a name, you can contact your states secretary of state office . Another option is to have an online legal filing service do the search for you and many sites will offer this basic search for free.
2. 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?
3. Create an LLC Operating Agreement
The operating agreement can just be a few pages, and you can find some samples on the Web. Even if your state does not require an operating agreement, it can be an important document to help clarify verbal agreements and prevent misunderstandings.
4. Register with the IRS
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Can A Sole Proprietor Pay Himself A Salary
Can I pay myself wages and withhold taxes? Answer: Sole proprietors are considered self-employed and are not employees of the sole proprietorship. They cannot pay themselves wages, cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the sole proprietorship.
How To Change From A Corporation To A Sole Proprietorship
If you’ve organized your business as a corporation, there may be circumstances when it makes sense to convert the business to a sole proprietorship. A sole proprietorship is when there is one person running a business and no distinction about the owner and business entity. Perhaps your business no longer has other owners or investors, or maybe the business once had employees but now just uses independent contractors. You may just want to simplify your tax filings and avoid the paperwork and expenses required to maintain a corporation.
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Find Out If Your Business Name Is Available
Lets say that a sole proprietor is running her dog grooming business under the fictitious name , Furry Friends Salon. If she wants to form an LLC for her business, she must check that another LLC or corporation hasnt already registered a company using that name in her state. Most states offer an online database for checking business name registrations. CorpNets free CorpNet Name Search tool provides a way to check, too.
What Legal Entity Would Be The Best Choice For Your Business Should You Choose A Corporation Or An Llc What Is The Difference
There is no single solution that works for every type of business. Your decision to incorporate or form an LLC will depend on your business objectives and industry, your financial goals, and your business growth plans.
A corporation will separate your personal assets from your business assets and give your company credibility to secure funding. S Corps are specifically designed for small businesses and as such, they are not required to file corporate taxes If you are planning on growing your business fast and issuing stock, you would do the best to incorporate your business as a C Corp, in which case you will have to pay corporate taxes. An LLC is a different type of business entity and one of the most popular business models for small businesses with fewer legal requirements and many of the same benefits as an S Corp. It offers protection for the members personal assets against bankruptcy or lawsuit, but just like a sole proprietorship, you pay taxes on your entire net income. Also, there is greater flexibility in how profits can be distributed amongst the owners than in corporate structures.
To learn more about whether an S Corp, C Corp, or LLC is the right structure for your business, its a good idea to consult with an attorney before you make the first step towards incorporating your sole proprietorship.
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Change Your Business Structure
The process to change a business structure is the same as starting a new business.
Use the Business Licensing Wizard to get information and links that will help you do the following:
Note: You will probably need to re-apply for all of the licenses you currently have. For example, if you are a building contractor, you will need to reapply for your contractors license with the Department of Labor & Industries.
Changing From A Sole Proprietorship To Anything Else
Since you become a sole proprietor by default when you start doing business as an individual, you change a business entity by simply forming a new business entity and contributing capital. For partnerships, this process can be as simple as signing a Partnership Agreement, while more advanced business organizations, such as Corporations , or Limited Liability Companies, will require more effort and paperwork. At a minimum, Articles of Incorporation or Organization will have to be filed with the appropriate state authorities. Corporations must also establish and conduct a formal meeting of shareholders, while LLCs are often less strictly regulated.
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How To Change A Sole Proprietorship To An Llc
As individual states govern business entities, you must follow your state’s procedures for changing a sole proprietorship to an LLC. Generally speaking, the process requires filing the same paperwork as anyone else creating a new LLC.
You may have to cancel your sole proprietorship’s trade name or Doing Business As before you can form an LLC. You may or may not be able to keep your same name depending on state naming laws.
Like any LLC, you must select a registered agent, file articles of organization, and draft an operating agreement. To get the business set up for taxes, you must apply for an Employer Identification Number .
Beyond that, you must be sure that you update all of your sole proprietorship bank accounts, contracts, and any registrations, such as trademarks and business licenses and permits, so that your new enterprise is named in them.
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.
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What Is A Corporation What Is An Llc
A corporation makes your business a distinct entity. In other words, it separates your business assets from your personal assets. Worried because you are the only person in your company? That is just fine one person or multiple people can own a corporation.
In most cases, if you are considering incorporating your small business, you will want to investigate S corporations. These are corporations especially designed for small businesses. S corporations are not usually required to pay corporate taxes instead they only pay taxes on dividend earnings. Growing fast? Want to issue stock? A C corporation will allow you to issue stock and set up a board of directors, but you will have to pay corporate taxes.
An LLC, a Limited Liability Company, is a different type of business entity. Like a corporation, an LLC offers protection for the owners’ personal assets in the event of a lawsuit or debt. The ownerscalled members when the firm is an LLCcan collect their profits through the company without paying corporate taxes in many states. There is also greater flexibility in how profits can be distributed amongst the owners than in corporate structures.
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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How To Convert From A Sole Prop To An 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 Incorporation . This has the basic information of your LLC: its business name, member , and who your registered agent is b) Operating Agreement: the document that states how the LLC is run, along with other bylaws, rules, and responsibilities of the member .
Register with the secretary of 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 to operate it legally. 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.
Preparing The Llc Operating Agreement
Next, you need to prepare an LLC operating agreement an agreement that is required in almost any state an LLC is formed. This agreement demonstrates the LLCs separate existence and permits you to define what should happen if you can no longer operate the LLC.
Even if the LLC has only one memberyouthis document needs to be drafted and completed.
If your LLC is a multi-member LLC, you need to make sure that everything about the division of ownership is clearly indicated, including how disputes will be handled. It should offer details about who has the authority to do certain tasks and when a vote is required for specific transactions.
The operating agreement should also include how membership interests should be transferred, how distributions should be made, and how the LLCs profits and losses will be divided. Also, the agreement should include how new members will be added.
You should always have a well-qualified business attorney, such as myself, review the operating agreement to make sure you cover everything you need. If you require this type of help, you can contact me anytime at .
Transfer Assets From Yourself To Your Llc
You can transfer assets owned by your Sole Proprietorship to your LLC by:
- making a capital contribution,
A capital contribution means you are using your Sole Proprietorships assets as cash to purchase ownership interest in the LLC.
On the other hand, you can assign assets/property to your LLC or your LLC can purchase assets/property from yourself .
Youll want to speak with an account, since depending on the value of the assets being transferred, there could be tax benefits to one method over another.
If you need to transfer domain names or digital assets, please see the following pages:
Check Your Business Name
When you are converting a sole proprietorship to an LLC, you need a unique business name. Your current business name might already be registered to another LLC in your state. If thats the case, you cannot operate as an LLC under that name, even if youve been using it as a sole proprietorship.
Check if the name is available by contacting your states secretary of state office. Many states have an online database for registered business names. You can also have a legal professional help you propose a name for your LLC.
Once youre sure no one in your state uses your business name, make sure it doesnt infringe on anyones trademark. Use the United States Patent and Trademark Offices database to search trademarks.
You must include Limited Liability Company in your business name. Or, you can use an abbreviation like LLC, Ltd., or Liability Co.
Usually, you dont need to register your LLC name. The name is automatically registered when you file paperwork to form the LLC. State rules differ, so double check with your state.
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How Do You Know How Much To Pay Yourself When Self Employed
When you do pay yourself, you just write out a check to yourself for the amount of money you want to withdraw from the business and characterize it as owners equity or a disbursement. Then deposit the check in your personal checking or savings account. Remember this is profit being withdrawn, not a salary.
Is Owners Draw An Expense
An owners drawing is not a business expense, so it doesnt appear on the companys income statement, and thus it doesnt affect the companys net income. Sole proprietorships and partnerships dont pay taxes on their profits any profit the business makes is reported as income on the owners personal tax returns.
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