Should You Convert Your Sole Proprietorship to an LLC?

Should You Convert Your Sole Proprietorship to an LLC?

A majority of American small businesses start out as sole proprietorships; however, once these businesses are launched and growing, it could better to change or convert the business to a limited liability company (LLC).

This is because when you operate your business as a sole proprietorship, the law does not recognize any difference between you and your business. If the business is sued, your personal assets could be in jeopardy to a legal judgment.

When you form an LLC, you create a separate entity — so in the eyes of the law, you are two separate entities.   This allows you some important advantages as an LLC owner:

• The LLC becomes liable for any business debts or legal judgments; your personal assets are protected.
• The LLC provides tax advantages that a sole proprietorship does not. Tax-wise, LLCs are also pass through entities, so profits and losses are reported on your individual federal tax return.
• The LLC can have more than one owner while a sole proprietorship may have only one owner. With an LLC, you an add partners or sell a percentage interest in the LLC to capitalize your business.

Once you have decided converting your sole proprietorship to an LLC, the steps to do so are fairly simple:

Choose a Name. In Florida, the name of an LLC must include the words “Limited Liability Company” or “Limited Company” or the abbreviations (LLC, LC, Ltd., Co.). The company name must also be distinctly different than other names already on file with the Florida Division of Corporations. You can check for name availability online.

Name a Registered Agent. Every Florida LLC must have a registered agent, which is an individual or business authorized to do business in the state that is appointed to accept legal documents on behalf of the LLC if a lawsuit is filed against it. A physical street address in Florida for the registered agent is also required.

File Articles of Organization. You must file Articles of Organization with the Florida Division of Corporations. These articles will include (1) the LLC’s registered agent’s name, address and signature; (2) name(s) and address(es) of the LLC manager(s); and (3) the effective date of the LLC if it differs from the filing date. The Articles of Organization can be filed online or by mail.

Create an Operating Agreement. Although not mandatory for Florida LLCs, operating agreements are highly recommended to establish parameters for the operation and ownership of the business. An operating agreement is essential for single-owner LLCs to set the LLC apart from a sole proprietorship, thereby protecting the limited liability status of the LLC.

Heed Tax and License Requirements. LLCs with more than one member must obtain an IRS Employer Identification Number (EIN). Single-member LLCs only have to obtain an EIN if you decide to have the LLC taxed as a corporation rather than a sole proprietorship. Depending on the LLC’s business type and location, local and/or state business licenses may be required.

File an Annual Report. To retain active status, a Florida LLC must file an annual report with the Florida Division of Corporations every year between January 1 and May 1. The annual report can be filed online.

Business owners seeking to protect their business interests should seek a qualified, competent advisor for assistance. Contact one of the experienced Florida business attorneys at Jurado & Farshchian, P.L., at (305) 921-0440, or email us at info@jflawfirm.com. We offer free consultations to business owners seeking to find the right attorney to meet their business’ legal needs.

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