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How to Transition From a Sole Proprietor to an LLC by @DeborahSweeney

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Is it ever too late to change the legal structure you initially incorporated as? Not at all. The entity formed for a business at its offset does not need to be its formation forever. Entrepreneurs have the option to change structures that best fit their needs, and many begin as sole proprietors. For those that are ready to make the leap from sole proprietorship to another entity type, like an LLC, here are a few tips to keep in mind.

1. Determine if you are truly ready to opt out of being a sole proprietor.

There are certain aspects of incorporating as a sole proprietorship that cannot be found in other legal structures. A couple perks include the ability to be the sole owner of the business and call the shots. This allows entrepreneurs to exercise complete control over their startup and truly act as the boss. A sole proprietorship is the easiest legal structure to form with a simplified tax process and affordable filing fees. It’s also a great entity if you run a business from home, like an Etsy shop or as an online consultant, where you don’t need a physical storefront.

However, the biggest drawback to remaining a sole proprietor is that there is no separation between personal and professional assets. The owner is liable for everything that happens within the business. This can include everything from losing valuable information to assuming the company’s debts and even being served with a lawsuit. Without liability assistance, it can be tough for an entrepreneur with a sole proprietorship to expand their business and protect their assets.

2. Decide whether an LLC or another entity formation is your best fit.

Before you can incorporate as a limited liability company (LLC), you’ll need to determine what each entity can bring to the table and your business.

As one of the most popular entities, an LLC allows entrepreneurs to keep their personal and professional assets separate. This is especially helpful in the event of an unforeseen circumstance and provides a growing startup with an extra cushion of liability protection. It also provides flexibility in being able to choose either an S Corporation or C Corporation as your tax entity. For those that qualify as an S Corporation, careful planning will allow you to avoid paying significant employment taxes. Keep in mind, however, that it’s not enough to incorporate as an LLC and be completely done with the process. You’ll also need to apply for permits (like a Sales and Tax permit, per obligations in your city, county, or state), business licenses and insurance, a DBA (Doing Business As name), and an EIN (Employer Identification Number).

For those with big expansion plans, a corporation offers the best of both worlds. You’ll receive liability protection for professional and personal assets within a formal business structure. This entity allows potential investors to invest capital into your business, provides the ability to issue shares, and makes it possible to take your business public. As far as taxes go, what you pay in taxes is based on what you choose to pay yourself from the corporation. You also have the option to elect an S Corporation status after incorporating to tax the shareholders, instead of the income of the corporation.

3. Look into a partnership.

Want a little extra support? A partnership is tailor-made for entrepreneurs that want to go into business with a partner, whether that’s a family member or friend. This structure allows entrepreneurs to share profits and losses with a partner and make decisions together.

Keep in mind that much like a sole proprietorship where you are liable for everything within the company, in a partnership you are liable for decisions made along with the actions of your business partner. Consider drafting a written partnership agreement together. This will allow you to establish partnership terms and outline capital contributions from each partner and their percentage of ownership in the company. You may also further detail the rules for admitting a new partner and outline procedures for the voluntary and involuntary withdrawal of the partner.

Once you have determined which entity formation you’d like to transition to, begin filing the proper paperwork with your local Secretary of State and pay the associated filing fee to make the changes.

 

 

Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.

How to Keep Your Business Compliant by @DeborahSweeney

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by Deborah Sweeney, CEO of MyCorporation.com

I cannot begin to stress how important it is to make sure your business stays compliant with the state. Small business owners have a tendency to procrastinate when it comes to filing important paperwork and paying state fees, but if your business falls out of good standing with the state you will have to pay, both monetarily and with your time, to get your company compliant again. It’s a much, better idea to instead just buckle down and stay on top of everything, especially these three required areas.

Your Estimated Tax Payments

You really don’t want to test the boundaries of government oversight when it comes to taxes and the IRS. Anyone who is self-employed and expects to owe more than $1,000 when they file their return has make quarterly estimated tax payments. If your business is a corporation and you expect to owe more than $500, you also have to make estimated tax payments. The IRS does provide instructions on how to determine estimated tax, and when payments are due – as a quick heads up, the next due date for 2013 is September 16th. For individuals, these instructions are part of the 1040-ES package, and for corporations the instructions are part of the 1120-W. Now, it is okay if your calculations are slightly off, but if you’re grossly underpaid you will be hit by some steep fines. Paying estimated taxes can feel a bit like trying to predict the future, so most accountants recommend you pay at least 100% of the taxes you paid last year. If you are really worried, re-estimate in the middle of the year (August is a good month to do this during) and see how close your estimates were to what you actually owed during the first two quarters.

Your Annual Reports

If you run your business as a sole-proprietorship, you don’t have to worry about annual reports – though we do recommend reconsidering your business structure. But, if your business is structured as an LLC or a corporation, most states will require you to file a report on your business and pay a fee every year. This report is meant to ensure that the information filed with the state, like who your registered agent is and where your business is located, is up to date. Not filing an annual report is one of the quickest ways to fall out of good standing, so make sure you always mark your calendar with when you need to file.

Respect Corporate Formalities

Neither sole-proprietorships nor LLCs have to worry about adhering to corporate formalities, though most business advisors suggest that LLCs should still hold annual meetings, adopt an operating agreement, and document any business decisions and financial activity for the sake of legal protection. Corporations, on the other hand, are required to adhere to strict, formalized operating procedures. When you form a corporation, you must hold an initial meeting for the directors to adopt bylaws, elect officers, and issue stock. After that, you have to have annual meetings for the directors and the shareholders, and keep the minutes for these meetings in your records. Business and financial activity must also be documented, and nearly any change to the business has to be adopted through corporate resolutions. It is easy to fall behind on the many formal requirements that corporations have to adhere to, but if the state looks into your records and sees you aren’t following the rules, they can revoke your status as a corporation. So keep detailed records and respect state requirements.

Staying compliant with the state can be a very time-consuming, arduous process, but it is something that every small business needs to do. Make sure you know exactly what deadlines you have to file by, how much money you have to send along, and what hoops you have to jump through to stay compliant. The last thing you want is to have to pay exorbitant fees and file a bunch of paperwork to get back into good standing, and putting in a little effort now will save you from having to worry and stress about your business’s standing later on.

Photo Credit: ♥beryl via Compfight cc

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About the Author:

Deborah Sweeney HeadshotDeborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @deborahsweeney and @mycorporation.