How To Switch From Sole Proprietor To Llc

Designate A Registered Agent How To Change From Sole Proprietor To Llc In Texas

Every LLC thats authorized to do organization in Texas must have a registered agent. This is real whether youre registering your service under the regulations of Texas or are an out-of-state company that will certainly be functioning in Texas.

A registered rep is a specific or company that approves lawful and main documents on your services behalf. An individual Texas local or an organization that is authorized to do operation in Texas can work as your registered representative.

If you select an individual, they must be:

• 18 years or older
• A Texas resident with a physical address in Texas
• Readily available to accept files during typical organization hrs.

Registered representatives in Texas should supply authorization to serve because ability, using Form 401-A. Acceptance of Appointment as well as Permission to Offer as Registered Rep.

This authorization type doesnt obtain filed with the state, yet the service needs to retain the signed duplicate with various other organization documents.

A business entity can not offer as its own registered representative, you or one more member of the LLC can offer as registered agent. The trouble with this is that a participant of the LLC may not constantly be readily available to accept company papers.

Consequently, several businesses choose to make use of on-line legal solutions, which will certainly serve as your registered rep for a service charge.

Why Would You Choose An S Corporation

An S corporation provides limited liability protection so that personal assets cannot be taken to satisfy business debts by creditors. S corporations also can help the owner save money on corporate taxes since it allows the owner to report the income that’s passed through the business to the owner to be taxed at the personal income tax rate. If there will be multiple people involved in running the company, an S corp would be better than an LLC since there would be oversight via the board of directors. Also, members can be employees, and an S corp allows the members to receive cash dividends from company profits, which can be a great employee perk.

Llc Vs Sole Proprietorship: How To Choose

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Choosing a business entity structure for your company is one of the most importantbut potentially most confusingdecisions youll make as a small business owner. Unless youre a lawyer or tax expert, the differences between each type of business entity can be hard to understand in real-life terms. However, your choice of business entity does have real-world impact, such as how much you pay in taxes, how much time you have to spend on paperwork, and what happens if someone sues your company.

New business owners are often confused about the difference between a limited liability company and sole proprietorship. In this guide, well look closely at LLCs vs. sole proprietorships, and explain exactly how they differ in terms of formation, taxes, legal protection, and more.

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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.

Sole Proprietorship Vs Llc

A sole proprietorship is an unincorporated business that one person owns. It is the easiest way to establish, maintain, and take apart , primarily because of the lack of government regulation. It allows small-scale business owners to try out the business venture. If its a small start-up business, its the only business structure that makes sense.

When mulling over an LLC ownership, keep in mind that the advantage of being a sole proprietor is that, as the owner, you pay personal income tax on the earned profits. But a business owner of a sole proprietorship is not exempt from liabilities incurred by the business. The owners personal assets and savings are at risk in case of legal challenges or if the business incurs debt.

This is where turning a sole proprietorship into an LLC comes into play. The main feature of a limited liability company is that it separates the owners personal assets from the business and, therefore, protects the property, ensuring that the business debt remains with the company. This business structure is between a sole proprietorship and a partnership, allowing for multiple owners .

The requirements for LLCs are minimal, and though they are encouraged to follow the same guidelines as some corporations, they arent legally required to do so.

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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.

Why Change A Sole Proprietorship To An Llc

One of an LLC’s main benefits is that this type of business entity offers its owners limited liability. from the business, you protect your own property and ensure that the business’s debts remain those of the LLC. That is, you are not personally liable for them.

Because of the limited liability concept, you may consider switching from a sole proprietorship to an LLC if you’re concerned about your personal property being subject to a lawsuit against your business. If you do not want your personal car or bank account to be potentially at risk in lawsuits against your business, for example, an LLC could be a better option.

That said, not every sole proprietorship can elect to become an LLC. In some states, certain licensed professionalssuch as attorneysare prohibited from forming LLCs and instead must organize their businesses as different types of entities. In other states, although those professionals may form an LLC, their personal property may not be protected from malpractice claims.

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Changes Affecting Single Member Llcs With Employees

For wages paid on or after January 1, 2009, single member/single owner LLCs that have not elected to be treated as corporations may be required to change the way they report and pay federal employment taxes and wage payments and certain federal excise taxes. On Aug. 16, 2007, changes to Treasury Regulation Section 301.7701-2 were issued. The new regulations state that the LLC, not its single owner, will be responsible for filing and paying all employment taxes on wages paid on or after January 1, 2009. These regulations also state that for certain excise taxes, the LLC, not its single owner, will be responsible for liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008.

If a single member LLC has been filing and paying employment taxes under the name and EIN of the owner, and no EIN was previously assigned to the LLC, a new EIN will be required for wages paid on or after January 1, 2009. If a single member LLC has been filing and paying excise taxes under the name and EIN of the owner and no EIN was previously assigned to the LLC, a new EIN will be required for certain excise tax liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008. The following examples may assist in determining if a new EIN is required:

You will be required to obtain a new EIN if any of the following statements are true.

Establish A Bank Account For Your New Business

As a sole proprietor, you might have collected revenue and paid business expenses all through your personal bank account. When you become an LLC owner, thats a big no-no.

Even if you set up a single-member LLC, mixing your personal assets and your business income in the same bank account blurs the line between you and your company. This undermines the reason you decided to create an LLC in the first place.

Many small business owners set up a business checking account, a business savings account, and a business credit card.

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Choose Your New Business Name

The first thing you must have to change a sole proprietorship to an LLC is a name for your new business.

You should start by running a business name search in your states database. Even if you used a name as your DBA previously, you must make sure that name is legally available for registration as an LLC.

You may need to cancel or withdraw your sole proprietorships existing DBA name to use it as your LLC name or wrap up loose ends with your old business. Check with your state and county to determine whether to withdraw a DBA name at the start or the end of the process.

Converting From A Sole Proprietorship

Converting a sole proprietorship to an SMLLC primarily involves preparing two key documents: The articles of organization and the operating agreement. These are the same documents you need to prepare if you want to form a new SMLLC . Your articles of organization get filed with the secretary of state , and you keep your operating agreement at your place of business. Keep in mind that some states have a different name for the articles of organization. Also, the operating agreement, while recommended, is not strictly required.

After you’ve filed your articles of organization and prepared your operating agreement, your sole proprietorship’s assets and liabilities generally will transfer directly to your new SMLLC without your needing to take any further steps. If your sole proprietorship had a single bank account with $10,000 in it, after the conversion that amount will be the property of your new SMLLC. Similarly, if your sole proprietorship had unpaid bills totaling $3,000, those debts will now be owed by the new company. Be aware, however, that if your sole proprietorship had a loan, for example from a bank, you’ll have to contact the lender to determine howor ifthat loan can be transferred to your newly-formed SMLLC.

• you’re paying wages to employees or
• you’re paying excise taxes.

Second, you’ll also need to obtain an EIN if you choose to have your new SMLLC taxed as a corporation.

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Just How Much Does It Cost To Register Llc In Texas

The Texas Secretary of State bills a $300 submission expense, plus an additional state-mandated 2.7% ease charge to submit an LLC Certification of Formation. It will certainly set you back $40 to file a name booking application if you want to book your LLC name before filing the Certificate of Creation.

The Pros And Cons Of Each Business Structure

If you first started your business on the side while keeping a full-time job, or you performed freelance work that didnât require much liability protection, a sole proprietorship likely suited your needs.

But as a business grows, so too does the need to keep your business and personal finances and affairs separate. Transitioning to an LLC is often a natural progression, because an LLC can limit your level of personal liability should your business ever be on the hook for a sum of money.

Before we jump into the process of transitioning from sole proprietorship to LLC, letâs take a look at how the two business structures differ.

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On Moving From A Sole Proprietorship To An Llc

When you decide to establish an LLC, it’s worth getting professional assistance if you can. The steps on making this move include:

• Checking the availability of the business name you want

• Applying for a new EIN with the IRS

• Opening new bank accounts in the LLC’s name

• Applying for necessary licenses and permits

• Notifying insurance providers of changes

• Changing business contact information and other incidentals

The Secretary of State office in your state will let you know if your desired business name is available. You’ll also file your Articles of Organization with your state office. You must dissolve your sole proprietorship or DBA with whatever city, county, or state where it was originally registered.

Your new EIN will be used for:

• Filing business taxes

• Opening bank accounts for your business

• Handling payroll

• Obtaining credit for your company

Any bank accounts associated with a sole proprietorship will have to be closed. You’ll open new bank accounts in your LLC’s name and with the new EIN. You’ll have to apply for all licenses and permits legally required for you to run your business. These may include:

• A professional license

• A health department permit

• A reseller’s permit

You’ll also have to contact your insurance provider to let them know you’re changing your business structure. Your provider will then be able to tell you if you have to purchase a new insurance policy for your business.

Finally, you’ll have to change your:

• Business letterheads

Llc Vs Sole Proprietorship: Legal Protection

In a sole proprietorship, theres no legal separation between the business and the owner. The owner is personally responsible for the businesss debts. If the business goes bankrupt, the sole proprietor has to file for personal bankruptcy, and both personal and business debts will be included in the bankruptcy proceedings. In addition, someone who sues a sole proprietorship can name the owner personally in the lawsuit and come after their personal assets.

One of the best ways to protect your personal assets is to form an LLC. Since an LLC is a legally separate entity from the owner, the owner isnt personally liable for the businesss obligations. If the business fails, the owners can file for business bankruptcy, and they dont have to pay business creditors out of their own pockets. And with some exceptions, someone who sues an LLC cant personally sue the owners. Of course, owners in an LLC can be held personally liable for fraud, negligence, or personally guaranteed debts. Theres no business structure that offers absolute protection for owners for liabilities connected to the business.

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What Is An Llc

An LLC forms a brand-new, legal “person.” This legally recognized entity holds many rights that a person does, including the ability to:

• Own property

• Buy and sell property

• Operate a business

LLCs provide protection for personal assets of the business owner in the event of a debt or lawsuit. In many states, owners also known as members are able to collect profits through the business without being subject to corporate taxes. Members in an LLC enjoy a great amount of flexibility in how profits are distributed.

LLCs are separate from the owners, so the business would be subject to legal obligations and most lawsuits, not you personally. LLCs also have some tax advantages over sole proprietorships, as these companies can structure their business taxes in various ways. If there’s only one member, or owner, in an LLC, the rules governing LLCs still apply.

How To Change From A Sole Proprietorship To An Llc In 7 Steps

Sole Proprietorships are easy to establish and maintain, but there may come a time when you need to change business structures to an LLC. Forming an LLC offers many benefits that a Sole Proprietorship does not, such as legal protection, but it does require a bit more money and work. In this article, we offer a step-by-step process to switch from a sole prop to an LLC.

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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:

Responsibilities Of The Llc Owner

With a new business structure comes new responsibilities. An LLC is a step further in business and, therefore, must follow specific laws and policies. LLC owners need to abide by the rules if they want to avoid piercing the corporate veil.

Can you pierce the LLC veil? The required behind the scene work that is needed to keep the LCC operating includes:

Being Mindful of Liabilities

The primary obligation of an LLC is to fulfill contractual obligations and pay the debt it incurs. In other words, they must comply with such responsibilities as performing properly under contracts, scheduling loan payments, paying wages, and compensating contractors, etc.

Other LLC responsibilities include:

Following Rules of Operating Agreement

One of the main differences that stands out when comparing LLC vs sole proprietorship is the operating agreement. LLCs are legally obligated to follow the rules of the agreement.

Paying Taxes

There is, however, an exception to the rule in the instance where the LLC chooses corporate taxation. LLC responsibilities will then include paying taxes as a business entity.

Filing Reports

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