Sole Proprietorship
Sole proprietorship is by far one of the most basic form of business to start. This is typically where an individual operates his or her own business. The advantage of a Sole Proprietorship is that it involves little or no paperwork and can be easily managed by anyone. However, the downside is that the owner is liable and responsible for the business’s debt. For example, if someone wants to sue your business, then they can go after you for everything you have including your personal properties.
What is an LLC?
An Limited Liability Company (LLC) is a form of business that combines the pass-through taxation as a Sole Proprietorship and limits the liability of the owner as a corporation. It’s like having the best of both worlds.
An LLC and a company both provide protection to limited liability to its owners; in case of default on a business loan, provided that the company has complied with all federal laws and acted properly and rules and regulations, the owners are not financially liable for the debts or obligations of the company and assets of the business owners cannot be seized by the courts to pay for them.
Thus the key thing is to complete the transition so that your business will actually benefit from the advantages you gain by forming an LLC.
Over the years, we have seen many errors in this transition and many times where someone is always in their individual business activity along with their new company without knowing about it.
How to transition to an LLC
The Transition from sole proprietorship to LLC steps are as follows:
- Form the separate legal entity (an LLC or corporation).
- Get a new tax identification number. Even if you had a tax identification number as a sole proprietorship you need a new one!
- Open a bank account in New in the name of the entity. Yes, even if you already have a bank account and you went from “Marketing Solutions” to “Marketing Solutions, Inc.” which is a new name and a separate legal entity and you need a NEW bank account. Yes, new controls too!
- Connect the DBA (doing business as) the new entity. When you filed the DBA in your local county, you were the candidate. That’s what makes the companies on your behalf. Now you need to “reconnect” the DBA to the legal entity of the New. This means that you need to dissolve the DBA name linked to you and refile (the same day) the name of DBA to the new entity. This means that the new entity is the applicant. This is what connects to the new entity. Now for the tax issues and the liability of any company in the DBA from that point is the new name of the entity.
- Get a new operating license in the name of the new entity. Yes, again. In general, you cannot transfer a license only your owner name to your new LLC. Reason? It is a separate legal entity.
- Get a credit card on behalf of the new entity. Stop using your personal credit cards to finance your business. Ask the bank how long the new entity has to be in business before they recommend you apply for a business credit card.
- Update all your sources of income with the new tax identification number of the new entity. Your goal is to avoid receiving unnecessary 1099s (which means that you want the money, but not for you more individually) for affiliate or referral fees by the end of next year. Make sure all your members are updated with new information from the entity.
- Update contracts in the name of the new entity.
- Updated sellers with your new name and entity information.
