Do you want to change your business entity from sole proprietor to LLC? If YES, here are 10 steps on how to change sole proprietorship to LLC in USA.
It is not out of place to start your business as a Sole Proprietor, but you may need to change your business status from Sole Proprietorship to Limited Liability Company as the years go by. The truth is that if your intention is to grow your business and have distribution networks and service centers spread across the United States of America, then you would not want to remain as a sole proprietor.
Setting up an LLC protects you from personal liability. If anything goes wrong in the business, it is only the money that you invested into the limited liability company that will be at risk. This is not same for sole proprietorships. Limited liability companies are simpler and more flexible to operate and you don’t need a board of directors, shareholder meetings and other managerial formalities.
Irrespective of the reason, the plain truth is that changing your business from a sole proprietorship to a Limited Liability Company (LLC) is affordable and relatively simple, and interestingly, there won’t be many changes in the way you operate your business.
If you want to change your business status from Sole Proprietorship to Limited Liability Company (LLC), then you would find the 10 steps outlined below very useful.
10 Steps on How to Change from Sole Proprietor to LLC in USA
STEP 1: Research to Make Sure Your Business Name is Available in Your State
You must make sure that the name you want to use is not already taken. You can be check if the name is unique by searching the name on your State Website. Also, make sure your business can use its name as a web domain. Even though creating a business website is not on your plan, it is best you purchase the URL to stop others from using it.
After you have registered a domain name, consider creating a professional email account. A professional email that makes use of your domain name is vital to establishing trust between your business and its customers. In this modern era where scam is on a high, companies need to make use of a professional email address to provide a sense of professionalism and credibility.
When you choose your name, then you must reserve the name. When you have chosen a name, reserve it by filling a Name Reservation form. To check the availability of a name, you can contact your state’s secretary of state office (some states offer an online searchable database). Another option is to have an online legal filing service do the search for you – and many sites will offer this basic search for free.
STEP 2: File Articles of Incorporation with Your State Government Office
The next step is to file specific paperwork, often known as Articles of Organization, with your state office. For successful registration of your L.L.C., you will be required to file articles of organization. These forms will help you to set up your L.L.C.
The document is straightforward and you’ll be required to provide information like:
- The name and address of your LLC
- Your LLC’s purpose. You typically won’t need to be specific here, and can even give a general answer like “The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state.”
- The name and address of your registered agent (this is the person designated to receive official papers for the LLC).
- An indication of your management: will your LLC be member-managed or manager-managed?
STEP 3: Create an LLC Operating Agreement
An Operating Agreement lists the rights and obligations of the members of the LLC. These include rules on how the LLC should be run, how taxes are to be paid, and how profits / losses are to be shared among the members.
The Operating Agreement also contains the list of members of your LLC and how much their stake is in the business. Even if you have a Single – Member LLC (you are the only owner), it’s still best practice to have an Operating Agreement.
Please note that it is not mandatory to send the Operating Agreement to your State Department of Assessments and Taxation, or to any other state agency. Just give a copy to any necessary members and keep a copy with your LLC’s business records.
In case your LLC is sued, having an Operating Agreement shows that your LLC is operating properly. This helps maintain your personal liability protection.
Please note that the operating agreement can just be a few pages, and you can find some samples on the Web. Even if your state does not require an operating agreement, it can be an important document to help clarify verbal agreements and prevent misunderstandings.
STEP 4: Acquire an Employer Identification number
An Employer identification number (E.I.N.) also known Federal Tax Identification number is a 9 – digit number similar to a social security number. The Employer identification number will be used to identify your business. It is like a social security number for your company.
An Employer Identification number is essential because you will need it to open a business account for your company, to hire employees as well as for tax purposes. You can obtain your E.I.N. from the I.R.S. after creating your company. You can do it via mail or online. Note: It won’t cost you a dime to get an E.I.N. from the I.R.S.
You can obtain an EIN from the IRS either
- Via mail (approval takes 4 weeks)
- Via fax (approval takes 4 business days)
- Via online application (approval is instant at the end of the application)
STEP 5: Open an LLC Cooperate Bank Account
Once the IRS has issued an EIN Number to your LLC, you can open a business checking account. It’s best practice to have a business checking account for your LLC in order to maintain your personal liability protection. Using a personal bank account for your LLC is called “commingling of assets” and this can lead to personal liability issues if you end up in court.
Having a separate business bank account for your LLC also makes record-keeping easier for accounting and tax purposes. Since banks in the United States have their own rules and regulations, it is recommend calling a few places to determine the following:
- minimum initial deposit
- minimum balance requirements
- monthly maintenance fees (if any)
Required State LLC paperwork: In order to open a business bank account for your LLC, you will need to have the following:
- Articles of Organization (stamped and approved)
- State Business License
- Initial List of LLC Managers or Managing Members
- EIN Confirmation Letter from the IRS
- Photo ID (driver’s license and/or passport)
- Operating Agreement (it may not be needed, but it’s a good to bring anyway)
N.B: Call the bank ahead of time and double-check what documents are required.
- LLC Members: If you have a Multi-Member LLC, all Members that want to be on the bank account should be present when opening the account.
- Debit card and credit cards: Most banks will provide a business debit card on the spot after the account is opened. If not, they’ll usually mail the debit card in 1 to 2 weeks.
- Non-U.S. residents: If you are a non-US resident that has formed an LLC in the US, you can still open a U.S. business bank account.
Please note that if you had a business bank account for your sole proprietorship, you’ll need to close that account and open a new one in the LLC’s name (and with your new EIN number).
STEP 6: File LLC Annual Report and Personal Property Tax Return
Additional tax and regulatory requirements may apply to your LLC. These may include:
- EIN: If your LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN), even if it has no employees. If you form a one-member LLC, you must obtain an EIN for it only if it will have employees or you elect to have it taxed as a corporation instead of a sole proprietorship (disregarded entity). You may obtain an EIN by completing an online EIN application on the IRS website. There is no filing fee.
- Business Licenses: Depending on its type of business and where it is located, your LLC may need to obtain other local and state business licenses.
- Department of Revenue: In some cases, for example if you have employees or will be selling goods and collecting sales tax, you’ll need to register with your state Department of Revenue (DOR).
STEP 7: Securing Business Licenses and/or Permits
The next step you are expected to take is to secure your business license and permits as the case may be. Please note that in order to operate your LLC you must comply with federal, state, and local government regulations. For example, restaurants likely need health permits, building permits, signage permits, etc.
The details of business licenses and permits vary from state to state. Make sure you read carefully. Don’t be surprised if there are short classes required as well. Fees for business licenses and permits will vary depending on what sort of license you are seeking to obtain. To find out more, contact your local agencies in the city, town or county where your LLC is located.
STEP 8: Sort – Out Taxes
- Federal taxes: LLCs have “pass through” taxation. Profits or losses flow through to your personal tax return and are usually listed on a Schedule C.
- State and local taxes: LLCs must register and pay taxes with the state Department of Revenue, as well as your local municipality (city, town, county, etc.). Depending on the nature of your business, you may be required to register for one or more forms of state tax.
- Sales Tax: If you are selling a physical product, you’ll typically need to register for a seller permit through the states Combined Registration Online Application website. This certificate allows a business to collect sales tax on taxable sales.
- Sales tax, also called “Sales and Use Tax,” is a tax levied by states, counties, and municipalities on business transactions involving the exchange of certain taxable goods or services.
- Employer Taxes: If you have employees in some states, you will have to register for the Unemployment Insurance Tax, and the Employee Withholding Tax through your state Department of Labor, Licensing, and Regulation.
STEP 9: Apply and Obtain Your Business Phone Number
Instead of using your home telephone number or your cell phone, you can purchase an affordable “virtual business number” specifically for your LLC. You can set this virtual business phone up to forward to your cell phone, go through voice prompts, or configure it any way you like.
Getting a separate business phone number for your LLC is also a good idea in order to keep your actual number private from those pesky “public record” websites. There are many options to choose from when it comes to official phone number, but just ensure that you choose a telecom company that will better serve your business.
STEP 10: Hiring of Employees
Of course, registering an LLC means that you will need employees and in order to get it right as regard hiring employees, you should ensure that you stay on the side of the law and here are some steps you should follow:
- Verify that your new employees are able to work in the US
- Report employees as “new hires” to the State
- Provide workers’ compensation insurance for employees
- Withhold employee taxes
- Print compliance posters and place them in visible areas of your workspace
Lastly, ensure that you find out more information from your state Department of Labor, Licensing, and Regulation website.
Changing your business status from Sole Proprietorship to Limited Liability Company is not a daunting task. Even after forming it, there are still some things you need to put in place before you commence operation.
Please note that the information in this article is provided only for general purposes and it is no way a legal advice. No lawyer – client relationship is established or should any such relationship be assumed. For legal advice, please consult a professional lawyer. Best of luck.