A sole proprietorship is considered the same legal entity with its owner. This type of business structure allows you to operate without having to file tax returns or pay taxes. You are personally responsible for paying income taxes and filing tax returns. If you want to take advantage of certain benefits, such as being able to deduct expenses, you must form an S corporation or partnership.
An LLC is considered a separate entity from its owners. This type of business entity is used for many different types of businesses including corporations, partnerships, limited liability companies, and general partnerships. An LLC is treated like a separate person for tax purposes. When it forms an LLC, the members become shareholders. Each member owns a percentage interest in the LLC based on his/her contribution to capital. In addition, each member is liable individually for the debts, obligations, and liabilities of the LLC.
Benefits of changing from sole proprietor to LLC
If you are thinking about starting your own business, it is important to understand how different types of businesses work. You want to know what type of business structure is best for you. There are many benefits to choosing one particular form of business over another. For example, sole proprietorships offer limited liability protection while partnerships offer pass-through taxation. In addition, there are certain advantages to operating under a separate legal identity such as a corporation or limited liability company (LLC).
Limited Liability Protection
A sole proprietorship offers limited liability protection because it does not provide individual owners with insurance coverage. If someone gets injured on your property, he/she could sue you personally and collect damages. However, if you choose to operate a business under a partnership or a corporation, you can protect yourself against lawsuits by purchasing liability insurance.
Pass-Through Taxation
In most states, individuals pay taxes on income earned regardless of whether they receive it directly or indirectly. This is called “pass-through taxation.” However, corporations do not pay taxes on profits they earn; rather, those profits are passed along to shareholders. Corporations often use pass-through taxation to reduce their overall taxable income.
Easier to Establish
Starting a business requires a lot of paperwork. Sole proprietorships require much less documentation than other forms of business ownership. A sole proprietorship is easier to establish than a partnership or a corporation. If you decide to start your own business, it might make sense to consider incorporating.
A sole proprietorship is an entity owned by one person. This person is personally liable for all debts incurred by the business. In addition, he/she must pay taxes on profits earned by the business. If you are considering converting your sole proprietorship into an LLC, here are some steps to take:
1. Determine whether your state requires registration. Some states require businesses to register with the secretary of state. Others do not. Check with your local government office.
2. Obtain an Employer Identification Number (EIN). You can obtain an EIN online at www.irs.gov. Once you have obtained an EIN, you can file tax forms electronically.
3. File federal income tax returns. Your accountant can assist you with filing your federal tax return.
4. Prepare federal payroll reports. You must prepare W-2 forms and Federal Tax Withholding Forms for each employee. These forms are filed directly with the IRS.
Your business name needs to follow local laws. If it doesn’t, you could face fines and even jail time.
Business names must include your full legal name, address, phone number, email address, and date of incorporation. You cannot use a fictitious name unless you’re doingsomething illegal.
2. File articles of organization
Fill out the articles of organization and file them with your local filing office. You do not need to pay taxes unless you are required to file quarterly returns. If you are not required to file quarterly returns, you can choose to file annual returns.
The articles of organization must include the following information:
1. Name of corporation
2. Address where corporate records will be kept
3. Type of entity (e.g., general partnership, limited liability company, etc.)
4. Principal place of business
5. Date of formation
3. Create an operating agreement for your LLC.
An Operating Agreement defines how the owners of the LLC are going to work together. This document lays out the rules that govern the relationship between the partners. If you don’t write one up yourself, it’s likely someone else will do it for you. You’ll want to make sure everyone agrees to the same terms before signing anything.
The most important thing to include in your operating agreement is the definition of “membership interest.” Membership interests determine ownership percentages and voting power within the company. For example, if you’re a 50/50 partnership, each partner gets equal votes. But if you’re a 75/25 partnership, the owner with 25% membership interest gets twice the vote power of the owner with just 5%.
You’ll also want to define how much money each member contributes to the company. In addition, specify how profits and losses are shared. Finally, set forth the procedure for dissolving the company.
4. Announce your LLC
In most states you must announce the formation of your limited liability company (LLC) online before filing an application with the secretary’s office. Some states require you to publish notice in newspapers or other publications, while others don’t require publication. Find out what steps you’ll have to take in your state by checking with your state’s Secretary’s Office.
5. Open a new bank account.
Separating your personal finances from your business finances is one of the best ways to avoid financial problems down the road. You might think it sounds like a hassle, but there are many benefits to keeping your money separate. Here are five reasons why you should consider opening a second checking account.
1. Protect Your Personal Assets
Opening a new bank account is a great way to safeguard your personal assets. If something happens to your main account, you won’t lose everything. In fact, you’ll still have access to most of your funds because they’re held in a different account.
2. Track Expenses Easily
Keeping your expenses organized makes budgeting much simpler. All of your receipts go into one place, making it easy to see how much you spent on what items. Plus, you’ll know exactly where to send your taxes each year.
3. Save Money On Fees
When you open a new bank account, you’ll usually pay lower fees. Some banks charge monthly maintenance fees while others don’t charge anything at all. But even if you do have to pay a fee, you’ll save money over time because you won’t be paying interest on your savings.
6 .Apply for an EIN
If your business needs to file an excise income tax return, you must apply for an Employer Identification Number (EIN). This number helps you avoid penalties and fines. You must obtain one even if you are not required to do so.
You must apply for an EIN within three months after filing your federal income tax return for the taxable year ending December 31st. If you fail to meet this deadline, you could face penalties and interest charges.
The IRS requires businesses to maintain records of all transactions related to their business activities for five years. These records include invoices, receipts, statements, etc. Your accountant can assist you in maintaining these records. However, it is still up to you to ensure that you have kept proper documentation.
Your business must report all payments received during the calendar year. In addition, you must provide proof of payment to your customers. Failure to do so could lead to fines and penalties.
In addition, you must notify the IRS about any change in ownership, location, or principal place of business. Failure to do so may cause you to lose your ability to claim certain deductions.
For example, if you sell your business, you must notify the government. Otherwise, you cannot deduct expenses incurred prior to selling the business.
Finally, you must keep copies of all documents filed with the IRS. You must retain these documents for seven years following the end of the year for which you filed.
7. Request business licenses and permits.
Businesses must apply for licenses and permits before opening. These include seller’s permits, zoning permits, health department permits, etc. You can find out about the requirements for each state here. Some states even offer online forms where you can complete everything yourself.
You don’t want to open your doors without getting the proper licensing and permitting done. If you fail to do so, you could face fines, penalties and legal action. And it doesn’t matter how small your business is; every business needs to comply with local regulations.
Frequently Asked Questions
Do I need a new EIN for my LLC?
If you already have an Employer Identification Number (EIN) for your sole proprietorship, you cannot use that number for your limited liability corporation (LLC). In fact, you must obtain a new EIN number for your LLC. There are several reasons for this:
1. Your current EIN does not meet federal requirements for an LLC.
2. An LLC requires a different form type than a sole proprietorship.
3. A sole proprietorship file is much easier to complete than an LLC.
4. Federal tax returns require a separate EIN for each entity.
5. Some states do not recognize a sole proprietorship as a proper business structure.
6. Many banks and credit card companies require a separate EIN number for each business entity.
How much does it cost to set up an LLC in South Carolina?
The cost to file an LLC varies depending on where you live. If you’re filing in SC, the cost would be $100.00. You may need to pay additional fees if you have a business license. In addition, you’ll need to pay a filing fee of $50.00. However, if you don’t want to register your company in SC, you won’t have to pay anything
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.
