Many entrepreneurs prefer to start up their business ideas as sole proprietors. This is because sole proprietorship businesses are easy to form, less expensive to start up, and require few legal formalities than other business structures.
However, as your business grows, a need to restructure the business from one person’s ownership to a limited liability company or a corporation becomes crucial to keep up with growth. Sole proprietorships offer zero protection to your assets and less tax flexibility, hence a need for a change.
Besides, a limited liability company or a corporation improves your organization’s credibility from financial institutions and lenders for a loan. Also, it creates confidence in your investors and customers, building their loyalty to the business.
Suppose you are currently experiencing challenges with your sole proprietorship business structure. In that case, it’s the right time to make a switch to either a limited liability company or a corporation. Below are the steps to guide you during the conversion process
Select a name for your organization
When converting your business from sole proprietorship to limited liability company or corporation, you will require a unique name. Conduct research by contacting your state’s secretary office to ensure the uniqueness of your entity’s name. Besides, you can seek the assistance of a legal institution to propose a name for your organization.
File articles of association with your state
After the name selection, you will be required to fill out official paperwork referred to as articles of association with your state’s filing office. The document highlights your company’s details, including its name, owners, address, and organization’s mission statement.
Create a limited liability company operating agreement
The agreement sets out the rules of LLC ownership and operations. The agreement outlines details, including:
- Shareholders voting rights
- Distribution of profits and losses among members
- Shareholders rights and responsibilities
- Dissolution of the company
- Asset distribution among shareholders
The document is critical to all limited liability companies as it helps to emphasize verbal agreements and avoid misunderstandings in the company.
Register with the Internal Revenue Service and announce your LLC
Your new LLC company is considered as a new legal entity from the sole proprietorship. Therefore, you must consult the IRS for a new registration to enable you to file your returns and for tax compliance. You will also be required to apply for a unique Employer Identification Number (EID).
Set your limited liability company’s bank account
Operating an LLC means creating a new legal entity different from the sole proprietorship. Therefore, you will be required to open a new bank account with the unique employer identification number in it. The new bank account helps to separate your savings from the business funds. If you previously had a bank account for your sole proprietorship, you will have to close it down.
Obtain business permits and licenses for your new business
Once you are done with all the steps, you need to obtain all the legal permits and licenses to start operating your entity. Consult your state officials to be aware of the requirements in your region. Some of the crucial documents include the seller’s permit, health department permit, business permit, zoning permit, among other forms.
Once your limited liability company is approved, you will need to cut ties with your sole proprietorship business to avoid mixing up the businesses, putting you into problems.