An LLC offers many advantages over a sole proprietorship for small businesses. For example, it protects you from personal liability and bankruptcy. And most states require an LLC to register with the Secretary of State’s Office and file annual reports, pay tax, and maintain insurance. However, there are several different methods of forming an LLC. This article explains how to change from a sole proprietor to an LLC.
There may be potential benefits of changing to an LLC Nebraska.
An S corporation offers limited liability protection, while a sole proprietorship puts your personal assets at risk if something goes wrong. An LLC gives you greater protection against lawsuits and other legal liabilities. And it provides many tax advantages. But there are drawbacks too. Here are some potential benefits of changing to an LLC.
Top Signs It’s Time to Convert a Sole Proprietorship Into an LLC
If you’re considering converting your sole proprietorship into an LLC, here are some signs that it might be time to make the change.
1. You Want More Flexibility With Your Business Expenses
A sole proprietorship gives you complete control over how much money you spend on your business. If you run a small business, you’ll probably find yourself spending less than $10,000 per year on things like marketing, payroll and office supplies. However, if you decide to start an online store, you could easily spend tens of thousands of dollars each year just on ecommerce software alone.
With an LLC, you won’t have to worry about paying extra fees every month to use certain types of accounting software or to purchase additional inventory. Instead, you’ll simply pay one membership fee. And since you’ll be sharing expenses among multiple members, you won’t have any worries about running up too high of a monthly bill.
2. You Need Limited Liability Protection
An LLC protects its members from lawsuits filed against them personally. In contrast, a sole proprietorship doesn’t offer any such protection. If someone sues you personally, you’re responsible for paying the damages.
3. You Don’t Have Any Employees
How to switch from a sole proprietorship to an LLC in Nebraska.
Most states allow sole proprietorships to convert into limited liability companies (LLCs), but it doesn’t happen automatically. You must file paperwork with the state and pay fees. Some states require specific types of businesses to convert. If you’re a doctor, lawyer or accountant, you might need to become licensed before you can form an entity.
Once you’ve converted, you can start operating under the laws of an LLC. This includes being able to deduct expenses against income and pass profits along to shareholders.
1. Find Out If Your Business Name is Available
A DBA is just like every other type of business entity. To start one, you must file articles of incorporation or organization with the state. You can do this online or via paper form.
In most states, filing fees vary depending on how much capitalization you plan to use. For example, New York requires $25 for each class of stock, while California charges $50 per class. Some states charge no fee at all.
Once you’ve filed the paperwork, you’ll want to check whether anyone else already owns your chosen business name. This is done by searching Corpnet.com. Simply enter the business name into the search bar and hit Enter.
If the name isn’t available, don’t worry. Many businesses choose to use variations of their names anyway. For instance, if you run a bakery called “The Bakery,” you could call it “The Bakeries” or “The Bakers.”
You can also check if another person has registered your business name with the federal government. Doing so is easy. Just go to www.uspto.gov/trademarks-and-copyrights and look up your business name.
2. File Registration Paperwork with the State
Most states offer an online portal where you can register your company. If you are filing Articles of Organization with the state, make sure you use the correct forms. You must complete Form AO-1, and submit it along with a copy of your federal tax return, Form 1040. You must include your social security number on both documents. In some cases, you may need to pay a fee to file your Articles of Organization. Check with your local secretary of state office about fees.
3. Create an LLC Operating Agreement
An operating agreement is required if you are forming an LLC in your state. This document establishes how the owners of the LLC will work together. It dictates what each member does and doesn’t do; how decisions are made; and whether there will be a board of directors. If you’re thinking about starting an LLC, read our guide on “How to Form an LLC.”
4. Obtain an EIN from the IRS
Obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) is easy. You just need to fill out Form SS-4, Application For Employer Identification Number, and submit it along with $25 to the IRS. Once you receive your EIN, you can use it to open a bank account, file federal tax returns, and obtain a Social Security number.
5. Set Up a Business Bank Account
An LLC owner must maintain a clear distinction between his/her personal and professional finances. Doing so keeps personal assets separate from the company’s liabilities. It also makes record keeping easier for tax reporting purposes.
Once a state has approved an LLC’s articles of organization and the IRS has issued the LLC an EIN (entity identification number), the new company needs to open a separate bank account. It cannot use an existing bank account that was used by a previous sole proprietorship. *This also applies to any personal or corporate checking/saving accounts.
Banks help entrepreneurs by helping them close their sole proprietor accounts, open an LLC (Limited Liability Company) banking relationship, and move existing business cash from the old accounts into the new ones.
Sometimes, sole proprietors don’t even open a separate business checking account and use their personal banking and/or debit card accounts instead. While that’s perfectly fine, it’s not advisable! If the Internal Revenue Service (IRS) were to audit the business owners, it would be difficult to produce accurate accounting records.
Business owners should consider obtaining an EIDN before opening a business account. Doing so allows you to avoid paying fees associated with opening a business account. A business owner should also consider getting an EIN before filing taxes. Filing without an EIN could result in fines and penalties.
Create your LLC Corporation with just 3 easy steps
6. Reapply for Business Licenses and Permits
If you’re starting a business, it’s important to know what steps you need to take to open up shop. You might already have a business license or permit, but if you don’t, there are certain things you’ll need to do before you start operating legally. In some states, you must apply for a new license every year; others require renewals every three months.
In addition to getting a new license, you’ll want to ensure you follow all local laws and regulations. If you plan to sell products or provide services, you’ll likely need to obtain a seller’s permit or contractor’s license. And if you operate out of a home office, you’ll need to register with the IRS as a Sole Proprietor.
You can find information about licensing requirements in each state online. For example, here’s where you can learn about New York’s licensing requirements.
The Corporation Service Company offers comprehensive solutions for obtaining business licences and permits across the United Kingdom and Ireland. They can help you file for a new licence or renewal, track your application status, and even handle payment processing.
7. Have a Plan for Maintaining Your LLC’s Compliance
If you are thinking about starting an LLC, it’s probably because you want to protect yourself against personal liability. You might even think about forming an LLC just to take advantage of tax benefits. But there are many reasons why you might form an LLC—and some of those reasons don’t involve protecting yourself from personal liability. If you’re considering forming an LLC, here are seven things you should know before doing so.
1. An LLC protects your personal assets.
LLCs offer limited liability protection for owners and managers. This means that if someone sues you personally, they cannot collect money from your LLC. Instead, the lawsuit must be brought against the LLC itself. In addition, if the LLC fails financially, creditors cannot come after your personal assets.
2. You can use an LLC for almost anything.
You can use an LLC for pretty much any purpose. Some states allow you to form an LLC solely to sell products online, while others require you to register a separate entity for each product you plan to sell. Still, most states allow you to form one LLC per state regardless of what type of business you intend to run.
3. You can operate your LLC out of your home.
Most states do not require you to set up a physical office space for your LLC. You can conduct your business from anywhere if you meet certain requirements. For example, if you live in New York City, you can start an LLC without having a physical presence in the city. However, if you want to qualify for a federal tax deduction, you’ll need to keep a physical address where you receive mail.
Frequently Asked Questions
What is a Registered Agent?
A registered agent (also known as an authorized representative) is the person or entity that you designate to receive legal notices on your behalf. The registered agent must be located in the state where your business is incorporated and have physical presence in that state. For example, if your company is incorporated in California, then you need to register a California-based registered agent.
What is a certificate of organization in Nebraska?
Certificates of Organization are filed with the Secretary of State’s office. They are used to establish and maintain the existence of an unincorporated association or corporation and provide proof that the entity has been formed under state law. The certificate must be renewed every three years.
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.