When Does A Business Need To Become An LLC? We put together a complete guide to help you with the transition.
When you turn your business into an LLC, you can help your business grow and protect your assets. In this guide, we will cover the instructions you need to form an LLC and if needed, how to transfer your DBA and EIN.
When Should You Convert A Sole Proprietorship To An LLC For A Business
You should be considering converting to an LLC or Limited Liability Company from a Sole Proprietorship when you have plans to grow your company and start earning profits.
Sole proprietorships are typically only suitable for low-risk or very low-profit businesses. For example, sole proprietorships are often the best way to start a small-scale enterprise or when trying out a venture that is low-risk to gauge whether it will be successful or not.
An LLC allows owners of businesses to expand their enterprises and also take on more risks. This is made possible since an LLC provides Personal Liability Protection.
What Is Personal Liability Protection?
Businesses that have Persona Liability Protection, cannot be held responsible personally should the company suffer losses. What this means is that personal assets such as bank accounts, houses, and cars are protected.
Reasons To Form An LLC
There are many benefits associated with starting an LLC. But the main reason why business owners should be forming an LLC is when the business starts to carry risk or when they start earning profits
Risk and profit are linked to liability. The personal assets of a sole proprietor are totally exposed to lawsuits and creditors since legally, the business is the sole proprietor. With an LLC, the business owner is legally separated from the actual business. Once your LLC is formed you will want to look into LLC titles.
When changing from a Sole Proprietor to an LLC, your business can benefit in the following ways:
- Protect your house, car, and savings
- Protect your privacy
- Allow for greater profits
- Gives you more peace of mind
- Increase your credibility
- Increase the potential for business growth
The Proper Steps To Change A Business To An LLC
Here are the steps involved to form an LLC:
- Name the LLC
- Select an LLC Registered Agent
- File the LLC’s Articles of Organization
- Create an LLC Operating Agreement
- Obtain an EIN
It is possible to start an LLC on your own when you use our free Form an LLC guide. You can also use one of the LLC formation services to register the LLC on your behalf.
Step One: Name Your LLC
The first step involves providing the state your business is in with a name that is both distinguishable and unique from any other registered name when filing your LLC’s formation documents.
Our How to Name a Business and our Business Name Generator guide is a free tool made available to entrepreneurs that may need assistance when it comes to naming their companies.
If you already have a DBA name for either your partnership or sole proprietorship, this needs to be carried over to the new LLC. The steps involved to convert or transfer a DBA name vary from one state to the next.
We suggest that you first choose your state in our Form an LLC guide for the information that you need on registering and searching for a business name.
It may also be necessary to make contact with your state to obtain directions on the right way to transfer a DBA registration. The contact information for each state can be found in the guides we have on offer.
Step Two: Select An LLC Registered Agent
The LLC registered agent that you choose will accept tax notices and legal documents on behalf of your LLC. Your registered agent should be listed when filing your LLC’s Articles of Organization.
Step Three: File The Articles of Organization For Your LLC
The Articles of Organization, also go by the name of a Certificate of Organization or Certificate of Formation in certain states, is the documentation that is officially filed to register your LLC with your state.
Step Four: Create Your LLC Operating Agreement
This is legal documentation that will outline the member duties and ownership of your LLC.
Step Five: Transfer An Existing EIN or Get A New EIN
Get a New EIN
EIN stands for Employer Identification Number and the US IRS (Internal Revenue Service), uses this number to tax and identify businesses. It can be compared to a Social Security number for the business.
When applying with the IRS directly, EINs are free. Refer to our EIN guide for more information on how to get a free EIN.
Transfer An Existing EIN
The IRS states that a sole proprietor that incorporates (for example, form a corporation or LLC in IRS language) is required to obtain a new EIN.