<strong>What is Form 8832?</strong>

This legal document is essential because it identifies the LLC's preferences regarding its taxation classification. The IRS will use <a href="https://llcguys.com/business-glossary/form-8832/" target="_blank" rel="noreferrer noopener">the 8832 form</a> to determine how they classify and tax the LLC, which can either be disregarded as an entity, a partnership or a corporation. By submitting this form, you are helping ensure that your business pays the right taxes in accordance with their wishes.

Changing From Sole Proprietor to LLC (A Comprehensive Guide)

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Are you a small business owner? If so, chances are that you have a sole proprietorship – the most common formation for businesses without employees (a total of 86.6% of non-employers).
However, as your company begins to expand, it may be beneficial to change from this structure and switch over to an LLC instead.
In this guide, we will cover what each type of entity entails, why transitioning might be advantageous for your organization, and how exactly one can move from being a sole proprietor into establishing an LLC.

If you want to skip the hassle of switching from a Sole Proprietor to an LLC yourself, consider using professional help:

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Quick Navigation

Hire Professionals to Form an LLC For You (from $0 + state fees)
Sole Proprietorship vs. LLC
- Pros and Cons of Sole Proprietorship
- Pros and Cons of Limited Liability Company (LLC)
4 Reasons to Change From Sole Proprietor to LLC
Potential Benefits of Changing to an LLC
How To Change From Sole Proprietorship to LLC in 6 Steps?
Hire Professional Help to Form an LLC in Any State For You
- #1 – Start an LLC Using Northwest Registered Agent
- #2 – ZenBusiness Will Form an LLC For You
Summary
FAQs

Sole Proprietorship vs. LLC

It’s critical to comprehend the distinctions and advantages/disadvantages of an LLC versus a sole proprietorship prior to making any changes in business structure.

Pros and Cons of Sole Proprietorship

As a sole proprietor, you are the only owner of your business and, consequently, file all self-employment taxes with the government. The law holds this type of business to be one legal entity that encompasses both yourself as an operator and your organization. Therefore, any income earned is taxed by personal income tax laws.

Pros:

With a singular owner, corporate secrets are kept securely and with ease.
As the single authority in the business, the owner has the autonomy to swiftly make decisions.
With minimal start-up expenditures and straightforward operations, launching a business has never been simpler.
Profits are not equitably distributed.
Restructuring your business into a partnership, LLC, or corporation can be done easily if desired.

Cons:

Oftentimes, the owner is overwhelmed with their workload due to having to constantly be present at the business location.
The owner could be confronted with a lawsuit, and all of their personal belongings seized to cover any outstanding business debts.
The recruitment and maintenance of top-notch employees is restricted.
The owner is restricted in the sources of capital that he/she could access.
The lifecycle of a business is dependent on the longevity of its owner.
Additionally, the proprietor will be taxed independently on their income.

Pros and Cons of Limited Liability Company (LLC)

LLCs offer exceptional protection to their owners and are the ideal structure for conducting business in the US. Essentially, a Limited Liability Company (LLC) is structured such that its members remain independent legal entities with separate liabilities from one another. This means that ultimately each member of an LLC remains shielded from debts acquired during operations by other members or even the company itself! You also need an EIN number because an LLC is a separate legal entity, one does generally need to update a new employer identification number when starting a new LLC.

Want to form an LLC on your own? But have no idea where to begin? Take a look at our guide on how to start an LLC.

Pros:

When forming an LLC, there is no limit to the number of members or owners that can be included. In fact, you could have one member or countless – it’s completely up to you!
The business has the option to be taxed as a C corporation, S corporation, partnership, or sole proprietorship.
The LLC could opt to be taxed under the flow-through income system.
Generally, members have a restricted financial liability on their individual assets.
As compared to C or S Corporations, LLCs require less paperwork when it comes to filing taxes.

Cons:

Unlike a corporation, an LLC does not have the ability to issue shares for capital raising.
Certain states levy extra taxes on LLCs, so it is essential to be aware of your state’s regulations.
Establishing an LLC may require high publication fees in certain states, such as Arizona, Nebraska and New York.
While corporations may not need to provide additional security for a business loan, members of an LLC are often asked to personally guarantee the funds.

4 Reasons to Change From Sole Proprietor to LLC

If you are starting a small business, it is wise to consider the advantages of creating an LLC instead of just forming a sole proprietorship. Not only will this provide more protection for your assets and finances, but also offers several other benefits that make establishing an LLC beneficial in the long run. Here are some top reasons why going with an LLC may be right for you:

#1: You Want to Protect Your Personal Assets

When you are a sole proprietor, your private assets can be utilized to satisfy any business debts or responsibilities. In contrast, if you choose the LLC structure for your company, then those same personal possessions stand independent of the business and cannot be taken into account as resources.

#2: You’re Planning to Add a Business Partner

By taking on a co-owner, your business will be automatically turned into a general partnership. Unfortunately, this does have its downsides – it increases your overall liability exposure significantly as you remain liable for any of the business’s obligations even if there was something that occurred without either one of you knowing or consenting to it. Forming an LLC is an excellent way to protect yourself and your personal assets should someone decide to file a lawsuit against the company!

#3: You Can Save Money on Taxes

As a self-employed individual, you must pay the payroll taxes that come with it. Forming and LLC and electing for S corporation (S-corp) taxation can help you save on these costs. With this method, owners become employees of their own LLC who only have to bear the burden of payroll taxes on their fair salary instead of all company profits. To gain more insight into this option, consulting an accountant is highly recommended!

#4: You Want to Hire Employees

As a sole proprietor, you can hire employees to assist with your operations. However, it’s important that employment and tax laws are properly followed. For instance, LLCs may be the better choice if you plan on hiring full-time workers since this structure allows for easier accounting of employee compensation and taxes. Not only that but forming an LLC will help protect your assets from possible disputes with employees due to being subject to applicable employment laws as well.

Potential Benefits of Changing to an LLC

Consequently, how can operating as a sole proprietorship prove to be unfavorable? It depends on the circumstances. No entity type is perfect for every business!

In this case, there’s an absence of both legal and financial separation between the company owner and their business in a sole proprietorship. If anyone decides to take action against your business or it happens that you’re unable to pay off certain debts, then you are solely liable for any liabilities and obligations the firm may have. As a result, all of your investments such as retirement funds, accounts in banks, cars, etc., will be vulnerable if someone attempts to reclaim them due to said unpaid debts from your company.

By forming an LLC, business owners (called members) can safeguard their personal possessions and assets. Since the LLC is considered to be its own legal entity, most of the time those owning it are not held personally accountable for any financial or legal obligations that may arise from running the company. Therefore, an LLC helps provide more protection than other forms of business when managing risks.

An LLC also offers unbeatable tax freedom. By design, an LLC is taxed in the same manner as a sole proprietorship, with all profits and losses reflected on the owner’s personal income tax returns. Fortunately for owners of eligible businesses that meet IRS requirements though, they can choose to be taxed as an S Corporation – this provides relief from some self-employment taxes!

How To Change From Sole Proprietorship to LLC in 6 Steps?

Step 1: Confirm & Choose Your Business Name

As the initial measure when transitioning from a sole proprietorship to an LLC, you must confirm if your desired business name is available in the state where you plan to register. Even though this might be your current label as a sole proprietor doesn’t necessarily mean it’s attainable for an LLC. To ensure that your preferred name isn’t already taken, conduct a search on the website of the agency that handles corporate registrations – typically referred to as secretary of state.

After ensuring that the proposed name is available in your state, it’s essential to search the USPTO database to make certain that no trademark laws are being broken. If you discover a potential conflict or find out that the name cannot be used in your area, then consulting an attorney may be beneficial and looking into other names might also prove necessary.

Step 2: File Articles of Organization With the State You’re Incorporating In

When you have finally selected the perfect name for your LLC, it’s time to submit the articles of organization and pay any applicable filing costs. Articles of organization are quite simple and just request a few essential facts about your LLC such as its address, purpose, registered agent information (who will be receiving legal documents on behalf of the LLC), and management style – is it member-managed or manager-managed?

Step 3: Draft and Execute an LLC Operating Agreement

You are also responsible for forming and implementing an LLC operating agreement. This legally binding contract between members of the LLC governs their respective rights and obligations, such as voting privileges, profit/loss distributions, retirement eligibility requirements, existing protocols, and noncompetition stipulations.

Our Full Guide on LLC Operating Agreement.

Step 4: File a Form SS-4 To Obtain an EIN

LLCGuys-Poster-EIN-Employer-Identification-Number

If you have an employer identification number (EIN) for your sole proprietorship, it’s still important to file a Form SS-4 in order to obtain a new EIN specifically assigned by the IRS to identify your Limited Liability Company. This nine-digit number is essential for filing taxes and reporting purposes – learn more about EIN.

How to get an EIN?

Step 5: Apply for a Business Bank Account

LLCGuys-Poster-Opening-a-Business-Bank-Account-Credit-Card

As a business grows, so too does the need to keep your business and personal finances and affairs separate.To protect your personal and LLC assets, it is imperative to open a separate bank account for the business solely owned by the LLC.

Step 6: Apply for Business Licenses and Permits

LLCGuys-Poster-Business-Permits-and-Licenses

Depending upon the industry and state laws, you might require to acquire extra business licenses as well as permits. An attorney or LLC service can be extremely helpful in this endeavor.

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Summary

Becoming an LLC is an important step in the growth of any business, ensuring that personal and corporate finances are kept separate while protecting its members from debt liability. If you currently operate a sole proprietorship, changing to an LLC with the IRS can seem daunting. However, armed with the right information and ready to take some decisive steps, the transition process really isn’t as difficult as it looks.

Additionally, make sure you consult with lawyers and other relevant experts regarding changes to insurance policies, contracts, banking documents, and other necessary paperwork. Taking these steps allows for a smooth transition from sole proprietor to LLC — helping your business realize its full potential!
And if you feel like you want to save some cash — hire our recommended experts to do the LLC formation for you!

Good luck!

FAQs

How much does it cost to change to an LLC?

Depending on your state, filing fees for LLC articles of organization can range from a few dollars to several hundred. Of course, if you enlist the help of an attorney or use a specialized LLC service provider, there may be additional costs associated with this process too.

Do I need an EIN?

When you run a single-member LLC, it is necessary to acquire an EIN if and only if: there are employees on board or excise taxes that need to be reported. You don’t require one for your Schedule C filing purposes or tax reporting. However, obtaining an EIN will come in handy when opening up a bank account under the name of your company and setting up state tax accounts – all of which become obligatory once you start hiring staff members along the way.

Which name should I choose for my LLC?

When selecting a name for your LLC, there are few legal requirements. Most notably, the chosen name must stand apart from any other business entity or trademarked phrase. As you will likely be doing business as (DBA) under your own personal name, it should also accurately reflect the type of services and/or products you offer to avoid misleading customers. Additionally, phrases such as ‘Limited Partnership’ and ‘Corporation’ should not be included in order to remain compliant with regulations.

Apart from the legal names that are forbidden, like City, Bank, Federal and Township since they carry a different meaning; you can consider your own name if it fulfills certain criteria such as originality, meaningfulness, domain readiness, social media presence and memorability. You have complete freedom to make an informed choice of what works best for your needs.

What is Form 8832?

This legal document is essential because it identifies the LLC’s preferences regarding its taxation classification. The IRS will use the 8832 form to determine how they classify and tax the LLC, which can either be disregarded as an entity, a partnership or a corporation. By submitting this form, you are helping ensure that your business pays the right taxes in accordance with their wishes.

Do I need a TIN to get EIN?

Absolutely, you will require a Tax Identification Number (TIN). This number is utilized by the IRS to monitor every federal tax. It contains details on all your past and present filed taxes with the Internal Revenue Service, just like when filing self-employment income taxes as a sole proprietor for both business and individual accounts.

What is flow-through income taxation?

In this case, the company does not pay corporate tax. This is a great strategy to avoid double taxation – when an individual and their business are both taxed separately as independent legal entities. Consequently, LLC owners will be required to pay taxes at regular income rates each year.

Can an LLC be converted back to a sole proprietorship?

Absolutely, transitioning a Limited Liability Company (LLC) back to a sole proprietorship is possible. Nonetheless, there are intricate steps necessary in the legal procedure including notifying creditors, filing required tax forms and documents, publishing resolutions, and transferring licenses.

Is the conversion process from sole proprietorship to LLC standard

Although the conversion process may vary in each state, there is a general framework of documents that must be filed by every LLC. To ensure you are following the right procedure, it’s essential to adhere strictly to the guidelines set forth by your own state’s laws and regulations.

Can I change my EIN from a sole proprietorship to an LLC?

Absolutely, you can modify the EIN from a sole proprietorship to an LLC. The IRS-issued Employer Identification Number (EIN) is solely used for tax filing purposes. It’s essential to keep in mind that each party is restricted to one single EIN, so it cannot be shared or distributed among other parties. Moreover, if you incorporate your business as a limited liability company for additional protection of personal assets and finances, then obtaining another new EIN should be done promptly – this will ensure those financial matters are kept separate from one another!

Can I convert my sole proprietorship to a corporation?

Have you ever considered elevating your business by transforming it from a sole proprietorship to a corporation? This may be the ideal move for your company once it has experienced considerable growth. As such, transitioning into this type of entity will grant access to an array of financing opportunities; think long-term loans and shares via stock market trading!