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Many small businesses get their start as a sole proprietorship. After all, it\u2019s the default business structure. If you\u2019re a single business owner and never filed any official formation paperwork with the state, then you\u2019re operating as a sole proprietorship.<\/p>\n
There comes a time when a sole proprietor wants to formalize the business. Perhaps you realized that your side hobby is now a legitimate and blossoming business. Perhaps you realized that operating as a sole proprietorship puts your personal savings and assets at risk should your business incur any debt or be sued. Or maybe you want to take on a new client who requires you to operate as an LLC or corporation.<\/p>\n
No matter the reason, the bottom line is it\u2019s affordable and relatively simple to create a Limited Liability Company (LLC). And, there won\u2019t be many changes in the way you operate your business. On the plus side, the LLC puts separation between your business and your personal assets and you\u2019ll have more flexibility in how your business is taxed. You may even change your perception of your business and feel more motivation to see it grow.<\/p>\n
If you\u2019re interested in forming an LLC, here\u2019s the general process. Note that specifics will vary by state, but these six steps will give you a general idea of what to expect.<\/p>\n
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Let\u2019s say that Jane wants to form an LLC for her business, Jane\u2019s Candies. She needs to make sure that there already isn\u2019t another business called \u201cJane\u2019s Candies\u201d registered in her state. To check the availability of a name, you can contact your state\u2019s secretary of state office (some states offer an online searchable database). Another option is to have an online legal filing service do the search for you \u2013 and many sites will offer this basic search for free.<\/p>\n
The next step is to file specific paperwork, often known as Articles of Organization, with your state office. The document is straightforward and you\u2019ll be required to provide information like:<\/p>\n
While the LLC is a great choice for those business owners looking for increased personal protection with less formality, there still is some paperwork involved. Some states require LLCs to create an operating agreement. This document is an official contract that spells out the management and ownership of the LLC. It can outline details like how much of the company each member owns, everyone\u2019s voting rights; how profits and losses should be distributed among the members; and what happens when someone wants to leave the business.<\/p>\n
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.<\/p>\n
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| Step<\/th> | Description<\/th>\n<\/tr>\n<\/thead>\n | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Research Business Name Availability<\/td> | Ensure your chosen business name is not already registered in your state by checking with the Secretary of State or using an online database.<\/td>\n<\/tr>\n | ||||||||||||||||||||
| File Articles of Incorporation<\/td> | Submit paperwork (Articles of Organization) to your state office with details like LLC name, purpose, registered agent, and management structure.<\/td>\n<\/tr>\n | ||||||||||||||||||||
| Create an LLC Operating Agreement<\/td> | Draft an official contract specifying management, ownership, voting rights, profit distribution, and exit procedures for members.<\/td>\n<\/tr>\n | ||||||||||||||||||||
| Register with the IRS<\/td> | Apply for a new Employer Identification Number (EIN) from the IRS, even if you had one as a sole proprietor.<\/td>\n<\/tr>\n | ||||||||||||||||||||
| Apply for a New Bank Account<\/td> | Close your sole proprietorship's bank account and open a new one in the LLC's name using the new EIN for financial separation.<\/td>\n<\/tr>\n | ||||||||||||||||||||
| Apply for Business Licenses and Permits<\/td> | Verify and obtain any necessary licenses and permits required to operate legally, considering changes in business structure.<\/td>\n<\/tr>\n | ||||||||||||||||||||
| Maintain Your LLC<\/td> | Regularly fulfill state maintenance requirements, such as filing an Annual Report and paying associated fees to maintain personal liability protection.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n
Advantages of Transitioning from Sole Proprietorship to LLC<\/h2>\nIf you’re contemplating the shift from a sole proprietorship to an LLC, it’s important to understand the potential benefits. Here are some advantages to consider:<\/p>\n
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