Many aspiring entrepreneurs launch their startups as sole proprietors. This structure is easy to establish, offers owners complete control, and involves fewer business fees. However, despite its many advantages, the sole proprietorship structure has many limitations once a venture grows. That’s why many owners transition from sole proprietors to limited liability companies (LLC).
An LLC is a business structure recognized across the US. It offers owners various benefits that protect them from the limitations of sole proprietorship and allow them to grow as a company.
In this guide, we’ll explore all the advantages of transitioning from sole proprietorship. We’ll also provide tips on establishing your business as an LLC.
Why Transition to LLC
Here are some reasons business owners shift their growing business ventures to LLCs.
As mentioned above, sole proprietors transition to an LLC because of their continuous growth. That means they’re reaching a point where they can no longer handle or manage all the business processes independently and need employees and partners to run them.
An LLC is crucial because it allows owners to account for their employees’ compensation and taxes. It’s also vital to create an additional layer of asset protection if there’s a dispute with an employee or partner. Plus, it could protect the business when someone within the organization makes a damaging mistake.
Sole proprietors are personally liable for conducting all business processes, like paying taxes, dealing with debts, and planning all legal contingencies. If the business is sued for malpractice or bankruptcy, the state can seize personal assets like homes, cars, and bank accounts to cover expenses.
Transitioning to an LLC helps business owners separate their assets from the company’s, protecting themselves and their properties if the venture fails due to a lawsuit or any similar legal action.
Since sole proprietors are technically self-employed individuals, they must pay taxes based on their venture’s income, which can be costly depending on how much money the business makes. Meanwhile, transitioning to an LLC allows owners to choose a structure where members can only pay taxes based on their salary. This is because the LLC is taxed as a corporation, and owners don’t have to pay self-employment tax on dividends.
Additionally, an LLC can act as a pass-through entity that doesn’t pay its own income taxes. With this structure, income, losses, deductions, and credits pass through an owner’s tax return. That means owners can avoid the possibility of double taxation.
The best part about launching an LLC is its relatively straightforward process. Although it involves numerous steps to accomplish, the requirements are attainable. Plus, they’re inexpensive compared to other business structures.
Owners can acquire and complete most paperwork online or at a local office in their chosen state. They can also hire professional assistance when forming their venture.
Setting up an LLC
The most crucial first step when identifying “how do you start an LLC” is to select the state where you want to start your business. The reason it’s vital is because LLC regulations vary from state to state. These include laws, requirements, and fees.
Ideally, you must choose a state where you live or where you often conduct your business. Once you determine your ideal state, you can learn all the procedures and requirements it mandates.
While the law varies per state, launching an LLC involves several standard steps. These are:
- Choosing a legal name
- Appointing a registered agent
- Preparing and filing the Articles of Organization
- Writing an LLC Operating Agreement
- Getting the Employer Identification Number (EIN)
If you’ve filed a “doing business as” (DBA) statement or a fictitious business name statement, you must cancel it before choosing a legal name. If you have existing insurance as a sole proprietor, you must update your policy by putting it under your LLC name. Consider looking into your policy during this process because you may need to add or remove coverages in your transfer.
After going through all the steps mentioned, the state will take around seven to ten business days to register an LLC as a legal entity.
Expand Your Business With an LLC
Changing from a sole proprietorship is a significant step you must take as your business grows. The process may seem lengthy and tedious, but it’s simple. Plus, once you’ve gone through these steps, you ensure financial and legal security for yourself and your business.