A sole proprietorship is owned by one person, while a limited liability company is owned jointly by several people. This distinction matters because it affects how you file taxes and what liabilities you face.
The IRS considers a sole proprietorship to be a personal tax status. If you run a business out of your home, you pay income tax on your profits at the federal and state levels. You could owe up to 35% of your net profit in taxes.
In contrast, an LLC is considered a separate corporate entity. As such, you do not pay income tax on your earnings; you report those profits to the IRS on Schedule E.
You must file Form 8832 to convert a sole proprietorship into an LLC. In addition, you must complete Schedule K-1 forms for each member of the LLC. These forms show the amount of money distributed to each owner.
If you operate a business as an LLC, you cannot deduct expenses unless you charge customers for goods or services. However, you can take deductions for business use of your residence.
Benefits of switching from sole proprietor to LLC
Limited liability companies (LLCs) are often confused with partnerships, and many people think that you cannot form an LLC unless you already have a corporation. This is simply not true. In fact, there are several benefits to forming an LLC over a sole proprietorship.
One benefit of forming an LLC is that it provides limited liability protection. While this sounds like a negative thing, it actually makes sense because it allows owners to protect themselves from personal liability. If someone sues you personally, he/she can only sue you personally, and the entity itself does not bear responsibility.
Another benefit of forming an LLC over a partnership is that it is much easier to establish. You do not need to file articles of incorporation with the state; you just need to register your LLC with the Secretary of State.
Finally, another advantage of forming an LLC is tax efficiency. All profits go directly to the owners, so there is no double taxation. Also, since each owner receives his/her pro rata share of income, taxes are calculated based on the total amount of income received.
A sole proprietorship is one way to start a small business. With it, you don’t have to file taxes or pay corporate fees. You’re responsible for paying income tax on profits earned. But there are downsides to operating as a sole proprietor. First, you’ll face increased paperwork. For example, you must keep track of every transaction, including purchases, sales and payments. Second, it’s difficult to expand your business because you won’t be able to take advantage of many resources. Third, you’ll find it hard to raise funds. If you want to use outside investors, you’ll have to convince them that you’re trustworthy. And finally, you’ll have no legal protection against lawsuits filed against you personally.
An LLC offers greater flexibility than a sole proprietorship. By forming an LLC, you gain access to certain benefits. In addition to protecting you from personal liabilities, an LLC gives you the ability to pass ownership of the business down to family members. Also, unlike a sole proprietorship, an LLC doesn’t require annual filings. This makes it easier to maintain records. Finally, an LLC lets you open bank accounts under your business name.
There are advantages and disadvantages to both forms of business organization. So how do you decide which type of entity is better suited for your needs? Here are some factors to consider:
• How much money do you plan to invest in starting up your business? Sole proprietorships usually cost less to set up. However, they limit your options. They make it harder to hire employees, buy equipment, purchase inventory and obtain loans. On the flip side, sole proprietorships offer greater flexibility. You can run your business however you like.
• Are you planning to grow your business over time? If so, an LLC might be better for you. As mentioned above, an LLC protects you from personal liabilities. Plus, you can transfer ownership of the business to family members.
• Do you plan to sell your business someday? If so, you’ll likely benefit from incorporating. You’ll avoid double taxation. Also, you’ll be able to protect yourself from potential buyers.
• What type of work does your business do? A sole proprietorship better serves some businesses. Others benefit from being incorporated.
1. Check your business name
In today’s world, everyone wants to start their own business. But what happens when someone else already owns the name you want to use? In some cases, you might be able to take over another person’s business name legally. However, there are certain things you need to keep in mind before doing so.
2. Check if your business name infringes on any other businesses’ trademarks.
If your business name contains a trademarked word or phrase, you could infringe on that trademark owner’s intellectual property. This could lead to legal action against you.
3. Avoid using restricted words without authorization.
Some words are protected under copyright law, and others are covered by trademark law. If you use one of those words without permission, you risk violating someone else’s intellectual property rights.
4. Don’t use your personal name unless you’re an established professional.
Your personal name doesn’t always make sense as a business name. For example, if you’re trying to open a restaurant called “The Cheesecake Factory,” you won’t stand out very much. Instead, pick something catchy and memorable.
2. File articles of organization
Fill out the articles of organization on the Secretary of State’s website. You’ll need the following information: name of the LLC, address, date you want it registered, and how many members are in the LLC.
You’ll pay a $100 filing fee to register the articles of organization. This fee covers both the initial registration and annual renewal. If you’re renewing an existing LLC, you’ll need to fill out the same documents again.
The Secretary of State’s Office will send you a receipt showing the filing fees paid. Once you’ve filed the articles of organization, you’ll receive a certificate of formation from the Secretary of State’s Office.
3. Write an LLC operating agreement
An LLC operating agreement is a document that describes how you want your company to operate. This includes things like how much money you are willing to spend, how many employees you want to hire, and whether you want to sell stock to investors. You might think it sounds boring, but it actually sets up some pretty important legal protections for your company.
The most common types of LLC operating agreements include Articles of Organization, Operating Agreement, and Bylaws.
Articles of Organization
This document is required when forming an LLC. It lists all of the members of the LLC, including each member’s name, address, email, phone number, and occupation. It also states how many members there are, the type of entity, and where the company is registered. If the company is formed in Delaware, the articles must be filed with the Secretary of State.
Operating Agreement
A typical operating agreement contains sections about the company’s purpose, management structure, compensation plan, ownership structure, and dissolution procedures. These sections are typically found under Article II.
Article I – Purpose
4. Announce your LLC
In most cases, you don’t need an attorney to form a limited liability company (LLC). There are many online resources where you can do it yourself. However, there are some things you want to know before you start. For example, you want to make sure you understand how the LLC works, what tax implications might come into play, and whether you need to file taxes for the LLC. Also, you want to make certain that you follow the rules regarding registering your LLC name.
You should check with your state’s Secretary of State before forming a LLC. Most states require you to register your LLC with the secretary of state’s office within 30 days of filing articles of organization. If you wait too long, you could lose your ability to use your LLC name.
Most states require you to publish notice about your LLC formation, including the date of formation and the names of the members, in a local newspaper. Some states even require that you send notices to each member. These notices usually include information about the purpose of the LLC, the address of the registered agent, the name of the LLC, and the amount of capital contributions required to become a member.
5. Apply for a new bank account
Separating your personal finances from your business finances helps keep things organized. You don’t want to accidentally spend too much on your business while trying to save up for retirement. And it’s important to know exactly how much money you’re spending each month. A separate bank account allows you to do just that.
You’ll likely already have one checking account for your personal use. But having a second account is helpful because it lets you keep your personal and business funds separate. This way, you won’t make mistakes like overspending on your business. Plus, keeping your personal and business finances separate will help you prepare accurate taxes.
Now might be a good time if you haven’t opened a new bank account since you started your business. Many banks offer online banking services that let you manage your money without needing to go into a branch. Call your local financial institution if you prefer to talk to someone about opening a new account. They can explain the available options and answer questions about fees.
6. Apply for an EIN
To obtain a new EIN number, you must file FormSS 4 with the IRS. You can do this online, by phone, or by mail. You can use the same form to request a new EIN for yourself or for someone else.
If you want to change your tax filing status from sole proprietorship to corporation or partnership, you will need to fill out Form 8832 and submit it to the IRS. This form is used to report changes in ownership or control of a business.
7. Apply for business licenses and permits
You are now ready to start running your business. But how do you know whether you need licenses and permits? And where do you find out about them? You might think that it’s easy to apply for a license, but there are many things to consider. In this article we explain what you need to know about applying for licenses and permits. We hope that this information helps you better understand the process of getting licenses and permits.
Frequently Asked Questions
Where should I form my LLC?
You probably already know that it’s important to form an LLC. But maybe you don’t know why. Or perhaps you do know why, but you’re still confused about where to file. We’ve got some tips for you.
The first thing we recommend is getting legal advice. An attorney will help you understand how an LLC works and what options are available to you. If you decide to go ahead without counsel, there are plenty of resources online to help you navigate the process.
We also suggest forming your LLC in the same state as your residence. This way, you won’t have to deal with multiple filing fees and taxes. And if you ever move to another state, you won’ t have to start over again.
Finally, we recommend starting small. Many states offer limited liability companies, or LLCs, that allow you to operate under one name. So, if you plan to open up shop as a sole proprietorship, start out with a simple LLC. It doesn’t have to be complicated.
Do I need a new EIN for my LLC?
If you already have an Employer Identification Number (EIN) for your sole proprietorship, you won’t need another one for your newly formed limited liability corporation (LLC). But if you want to file an S Corporation or Subchapter S Corporation tax return, you’ll need a new EIN. However, there are some exceptions to this rule. We’ll explain what those are.
James Rourke is a business and legal writer. He has written extensively on subjects such as contract law, company law, and intellectual property. His work has been featured in publications such as The Times, The Guardian, and Forbes. When he’s not writing, James enjoys spending time with his family and playing golf.
