Is An Llc Always The Best Choice
Life is all about making choices and choosing to form an LLC can be a very important one. Asset protection consultants routinely market to business owners stating that an LLC is always a good idea, but I do not believe this to be true. Some entities are actually better suited for a sole proprietorship as the additional costs of an LLC do not provide any significant benefits over operating as a sole proprietor.
Also, understand that with the concept of an LLC providing liability protection against commercial acts of your business, a savvy attorney is going to try to find any loophole he can in your current setup to pierce the corporate veil and go after personal assets.
In addition, some courts may not look favorably upon sole member LLCs, and the question comes up in legal proceedings as to whose interests are you being protected against if technically, you are the only member of the LLC.
Pros And Cons Of Sole Proprietorships
If youve decided to take on this endeavor by yourself, a sole proprietorship is probably the way to go. The advantage? Complete control.
Unlike an LLC, there arent any complicated legal agreements involved that determine ownership. If youre a sole proprietor, you can run the business however you want.
| The Pros | |
|---|---|
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Complete control and flexibility to run the business as you see fit |
Personally liable for all business debts, youre all by yourself |
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Unlimited liability means creditors are more likely to extend credit if needed |
Banks are reluctant to give loans due to higher turnover rates and usually smaller assets |
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You receive all business profits |
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Smaller amounts of capital make for easier organization |
Since the business relies on one person only, it is harder to raise capital on a long-term basis |
Stay On Top Of Renewals
Most states require you to file an Annual or Biennial Report to keep your LLC in good standing, so make sure you know when that form is due and what the filing fees are.
Ready to take the plunge from sole proprietor to LLC? Let CorpNet help! Download our free How to Form an LLC Guide to get started.
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How To Convert A Sole Proprietorship To An Llc
The process of establishing an LLC may vary from one state to another, but it generally involves the following procedures and requirements:
Name Your LLC
The first step to changing your sole proprietorship to an LLC is choosing a business name. If the current name of your business is already taken by another registered LLC in your state, you need to change your business name to something unique. To make sure that your business name is available, you can contact the office of the Secretary of State. Many states have databases of registered business names on their websites.
If the name you chose is available, you have to make sure that it does not violate someone else’s trademark. You can do this by using the trademark database on the U.S. Patent and Trademark Office’s website. In addition, you are required to include Limited Liability Company, Liability Co., LLC, or an equivalent term or abbreviation in your business name.
File the Articles of Organization
Next, you need to file the Articles of Organization with the Secretary of State or the appropriate state agency. When completing this document, you are required to include the following information:
- Name of your LLC
If You Have A Sole Proprietorship When Should You Form An Llc
The decision is ultimately yours. However, keep in mind that legal protection for your new business can be important to your well-being and the longevity of your business. Forming an LLC early on can help protect you personally from business liability. It can also make your business appear more stable to lenders and vendors, as well as customers and business partners. With that in mind, it can be an investment in your success.
Running a sole prop is as easy as getting to work and tracking your income and the breakup. You are the owner and the company, so all decisions are yours. This makes it easy for you to get started, but as your business grows, you take more risks.
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Ongoing Business Compliance Requirements
Sole proprietorship: Since the state does not recognize a sole proprietorship is an independent legal entity, there are no compliance requirements for companies. However, other ongoing requirements may apply to the legal operation of the business, such as: renewing business licenses, permits, and DBAs may apply to legally operate the business.
Limited Liability Company: LLC compliance requirements vary by state. These may include: filing an initial report with the government Filing an annual report with the state , keeping business funds and transactions entirely from those of the owner, filing amendments when there are major changes to the LLC that need to be updated in the LLCs Articles of Organization.
What Is The Difference Between A Sole Proprietorship And A Partnership
A sole proprietorship is the default business structure that is used if you create a business, but file no paperwork. Therefore, you are said to be operating as a sole proprietor.
A partnership, however, is a more formal business structure that is set up by two people. While there is little paperwork involved when forming a partnership, there are in fact other items to consider, such as where to register and how the business will be managed by the partners.
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Can I Add Another Person To The Incorporation
Yes, if you wish to add someone to the incorporation as a director who was not part of your original business, now is the perfect time to add them. As a Sole Proprietor, you were not able to add other partners to your business registration however, this is not the case with incorporating, and new directors can be added to an incorporated company at any time.
Drawbacks Of Converting To Singapore Pte Ltd
While converting to a Singapore private limited company will mitigate most of the issues outline above, there are some drawbacks to operating a Pte Ltd company.
- The administrative burden of operating a Pte Ltd company is heavier.
- Winding up a company is more complex and complicated
- Private limited companies must adhere to more stringent rules and regulations set out in the Singapore Companies Act. For most common compliance issues, refer to Singapore company compliance requirements.
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Is An Llc A Corporation Or Sole Proprietorship
A limited liability company is one of the most popular business structures, and its flexible nature means that it can elect to be taxed in several different ways:
- As a corporation
- As a sole proprietorship
- As a general partnership
This can make starting business owners slightly confused about the exact legal classification of LLCs.
So, is an LLC a corporation or sole proprietorship? Because its a hybrid structure, the answer is both and neither.
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Single Member Llc Vs Sole Proprietorship
Most small business owners default to a sole proprietorship, simply to avoid the paperwork and payments required to become an LLC. And, in terms of daily management including hiring employees or freelancers, working with accountants, etc. a single member LLC and sole proprietorship looks largely the same.
However, a single member LLC creates a divide between the business owner and the business itself for both tax and legal matters, while a sole proprietorship does not. If you own a sole proprietorship, then you will be taxed on your personal income regardless of how much revenue you generate from your business. This can become unnecessarily costly if your household makes a considerable amount, but your business doesn’t.
Additionally, you are personally liable for any risks associated with your business. For instance, if your business becomes bankrupt, creditors can take your personal possessions.
On the flip side, a single member LLC likely needs to create an operating agreement, while a sole proprietor does not. Even if it’s not required by your state, an LLC operating agreement is a legal document that helps your business appear more official and will cover important topics related to the management of your company including ownership structure, member’s voting rights, capital contributions, and distribution.
Since tax is one of the biggest differences between an LLC and sole proprietorship, let’s dive into that, next.
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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.
No Written Partnership Agreement
When no written partnership agreement exists, the process of going from a partnership to a sole proprietorship can be more complicated. First, when dissolving a partnership, you must divide all assets and liabilities of the partnership. Each party is entitled to his or her equal share of any proceeds and is responsible for any remaining liabilities.
If one party wishes to continue the business using the same name and assets of the partnership, the parties must reach an agreement determining the terms for the dissolution. This agreement should be in writing and signed by all parties. It must include all terms, such as use the name of the former business, assets, and customer lists. A complete written agreement prevents future disputes and possible court action.
The partner seeking to continue the business needs to consider any liabilities the partnership has accrued. This includes not only debts, but ongoing contractual obligations. Take these liabilities into account when calculating the value of the partnership as an ongoing sole proprietorship.
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Incorporate A Private Limited Company
The first step to setting up your company is the approval of your business name. According to Singapore law, no two entities can have the same business name. If you wish to set up your Singapore Pte Ltd company using the existing business name of your sole proprietorship or LLP, you must submit a ‘No Objection Letter’ to the Company Registrar. The letter must explain why you wish to retain the business name and also state whether the companies are owned by the same person. You must also undertake to cease operations of the old business entity within 3 months from the date of incorporation of the company.For more details on incorporation requirements and procedures, refer to Singapore Company Registration guide.
Can You Change A Sole Proprietorship To An Llc
LLCs offer more protection, tax benefits, and other advantages that make them worth considering as business entities.
If you currently own a sole proprietorship and wonder whether you can change it to a limited liability company , the simple answer is yes.
A deeper question underlying this simple query involves when a change from a sole proprietorship to an LLC might be advisable. You might also want to know what procedures to follow to make the change from a sole proprietorship to an LLC, as well as what your new responsibilities include as the owner of an LLC.
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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.
Determine If You Can Use Your Dba Name
States require LLCs to have a name that no other registered business uses. You will need to search for your new LLC name to make sure it is unique.
Assuming you have a doing business as name for your sole proprietorship, your existing business name must meet all of your states requirements for an LLC. You also need to convert or cancel your DBA registration before filing the Articles of Organization for your new LLC.
You can search business names and learn more about your state’s guidelines on our Form an LLC guides.
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Advantages For Converting A Sole Proprietorship To Llc
There are 3 main advantages for converting your proprietorship into a Limited Liability Company . The main advantage of operating as a limited liability company is that there is limited liability for the sole proprietor which means the owners personal assets are not exposed to the risks and liabilities of their business operations. The concept of the LLC statute is that the owner does not have any personal liability for business debts solely by reason of being a member. This liability protection could be particularly advantageous if you have employees working in the business, as their actions could potentially expose the owners personal assets. Of course, this does not relieve the owner of responsibility for personal actions nor for any debts personally guaranteed.
The second advantage of forming an LLC is the flexibility of choosing to be taxed as either a partnership, S-Corporation or as a sole proprietor, despite forming a separate LLC entity under state law. This becomes important because you can start off electing to be taxed as a sole proprietor, and as your business grows and when your annual net income exceeds $20,000 you can elect your LLC to be taxed as an S-Corporation. You can pay yourself a reasonable salary and then set up and contribute up to $15,500 to a Simple IRA, as well as up to $6,500 to a Roth IRA to maximize your retirement savings.
| LLC Taxed as an |
Choose A Name For Your Llc
The name of your LLC must comply with your state’s rules. While these rules differ, most states require 1) that your LLC’s name end with an LLC designator, such as Limited Liability Company or Limited Company, or an abbreviation of one of these phrases and 2) that the name not be the same as the name of another LLC or business entity already registered with your state.
Often, for a small fee, you can reserve your LLC name for a short period of time until you file your articles of organization.
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File Your Articles Of Organization
Once youve made sure your name is available in your state, youll need to file your Articles of Organization forms. These usually can be found on your states Secretary of State website, or you can hire CorpNet to file them for you. In this simple document, you will be required to fill out information on:
- Name and address of your business
- The purpose of your LLC
- Name and address of your registered agent
- Whether your LLC will be member-managed or manager-managed
Converting Your Sole Proprietorship To An Llc In 8 Simple Steps
HomeBlogStartup and LaunchConverting Your Sole Proprietorship to an LLC in 8 Simple StepsPreviousNext
Any business that doesnt deliberately choose a business structure launches by default as a sole proprietorship . But sometimes down the road, needs change, and the business starts to consider a different structure to protect itself.
If this describes your business, read on. Ill tell you how to easily convert your existing sole proprietorship into an LLC.
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What Is An Llc
Unlike a sole proprietorship, an LLC ensures that the personal assets of its owners will not be seized in the event of a lawsuit or debt collection action. In many states, an LLC’s owners, who are also called members, are able to receive distributions of the company’s profits without having to pay taxes at the company level. The members also enjoy greater flexibility in profit distribution compared to a corporation.
Can I Use My Sole Proprietor Dba For My Llc
If you already are using a sole proprietor DBA name and want to use this same DBA name as the business name for your new LLC, your current sole proprietor DBA will need to be canceled or withdrawn. When you form an LLC, you can register the new LLC’s name to be the same name as your sole proprietor business. Or if necessary, you can file a new DBA to use with your LLC.
But before you try to form an LLC with the same name as your sole proprietor DBA, you will also need to check to see if your DBA name is currently registered as an LLC name by some other business owner if it is, you will need to choose a different business name for your new LLC.
Converting your sole proprietorship to an LLC is a smart choice to make if youre concerned about protecting your personal assets from the worst-case scenarios of a lawsuit against your business. For a minimal investment of time and money, your business will be a separate legal entity from your personal finances, and you can continue doing business as usual. Other than registering the LLC, filing an annual report and making the changes recommended in the steps above, the day-to-day operations of your business don’t have to change much compared to when you were a sole proprietor. Converting your sole proprietorship to an LLC brings many benefits and very few complications or downsides. Learn more about the advantages of forming an LLC vs. a sole proprietorship.
Ben Gran
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