Small business entrepreneurs tend to establish their ventures as sole proprietorships because of how simple and affordable they are. But as their venture grows, the time will come when they’ll need a more comprehensive structure, like a limited liability company (LLC).
Converting your sole proprietorship into an LLC is a smart move to make for your startup. Aside from protecting your personal assets, LLCs have several other benefits that can help your business grow to its full potential.
If you want your business to thrive in the future, it’s time to think about converting entities. This article will discuss why a sole proprietorship may want to convert itself into an LLC and the steps necessary for the conversion process.
Why Should I Convert My Sole Proprietorship?
Before we explore the steps of converting sole proprietorships to LLCs, let’s discuss why some businesses consider converting in the first place. We’ve listed down the three popular reasons why people incorporate their sole proprietorships.
Sole proprietorships don’t have limited liability protections. It doesn’t create a separation between you and your business, which means any debt incurred by your startup is your responsibility.
If you want to take out a loan for your business but don’t want your personal assets to be at risk, you’ll need the strong liability protections of an LLC.
LLCs are considered separate legal entities from their owners. This means there’s a distinction between what the company owns and what its owners own.
If the company goes into debt or someone decides to sue them, their owners’ personal assets are kept safe from any legal obligation.
Most sole proprietorships that take in partners are converted into general partnerships. But one disadvantage to this structure is that the owners are fully liable for their business obligations, including that of their partners.
If your business partner decides to take out a loan on behalf of your startup and they were unable to pay it back, you’ll be held responsible for the debts. However, if you structure your startup to be an LLC, you’ll be protected against any legal obligation your company has.
Last, if not the most popular reason, why people convert their sole proprietorships into an LLC is tax savings. The IRS doesn’t have a dedicated tax category for LLCs. Instead, they’re allowed to elect their tax treatment.
For example, most LLCs have a pass-through tax status, which means they’re not obligated to pay corporate taxes. All their owners have to do is pay their individual taxes based on their salary.
With all these benefits in mind, it’s unsurprising that most sole proprietors convert their businesses into LLCs in the long run.
How to Convert A Sole Proprietorship to An LLC
Converting business entities may seem daunting, but careful planning can make the process easier. Here are the seven steps you need to follow when converting your sole proprietorship.
Choose a name
The first thing you need to do when converting your sole proprietorship to an LLC is to think of a new name. If you want to use the same name you’re using for your sole proprietorship, you need to make sure that it’s available to be used on an LLC.
You can use the Nevada Business Search to check if your chosen name is still available. If it’s not in use, you can reserve it for 90 days for $25. All you need to do is to submit a name reservation form to the Secretary of the State.
Look for a Registered Agent
Nevada requires LLCs and corporations to have a registered agent. The registered agent will be authorized to receive legal documents and notices on behalf of your company.
Your registered agent should be able to accept any document sent to you by the Secretary of the State. This means that they need to have an address in Nevada.
You can appoint any existing employee as your registered agent as long as they live in Nevada. If you need help hiring one, you can contact a registered agent service provider for assistance.
File your Articles of Organization
Once you’ve chosen a name for your LLC, you need to file your Articles of Organization to the Secretary of State. This document typically includes the following information:
Your LLC’s name
The name, address, and signature of your registered agent
The name and address of the person forming the LLC
The names and addresses of each manager or managing member
You have two options when filing your articles; you can submit them online via the Silverflume portal or send them via mail. Either way, you’ll have to pay a filing fee of $75 for the documents.
Get a new Employee Identification Number (EIN)
Even if you have an existing EIN, you’ll need a new one for your LLC. Once you incorporate, the IRS will consider your LLC as a new entity. It’ll be a different and separate entity from your sole proprietorship, so you can’t use the same EIN anymore.
Once the Secretary of State approves your LLC filing, you can get your EIN through the same process as your first one.
Draft and establish an LLC operating agreement
Nevada LLCs are not legally obligated to create operating agreements, but it’s highly recommended that they have one. These documents help establish the rules and operating procedures of a company. It typically specifies the rights and obligations of each member of the company.
Ultimately, they help prevent misunderstandings by guiding you on what to do if there’s a conflict between members.
Cancel your DBA
If your sole proprietorship operates under a Doing Business As or fictitious name, you’ll need to cancel or withdraw it from the Secretary of State.
You can complete a Certificate of Termination and submit it to the county clerk’s office in person or via mail.
Apply for new business licenses and permits
Now that you’re operating under a new enterprise, you must get new licenses and permits for your operations. We also suggest updating your bank accounts and other registrations during this time.
It’s vital that you update all of your legal documents to include your new LLC to avoid running into any other problems in the future.
Convert Your Entity Today
If you need help converting your Nevada sole proprietorship to an LLC, look no further than NCH.
NCH is one of the state’s leading providers of business formation services. Not only do we help our clients in building their companies from the ground up, but we also guide them through entity conversions.
Learn more about what NCH can do for your business by visiting our website or calling us at 800-508-1729.
DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.