Many small businesses start out as sole proprietorship, most likely because it's the easiest and simplest business structure to erect and maintain. As the business grows or goes in a different direction, however, it often becomes necessary to change the business structure to something that offers more protection from potential liabilities such as lawsuits. Here's more information about single-member LLCs, and how to transition to one from a sole proprietorship.
What is a Single-Member LLC?
Traditionally, the limited liability company (LLC) structure is used when there is a partnership between two or more people. This business structure protects the partners' personal assets from creditors while allowing them to report their profits and losses on individual—rather than corporate—tax returns (thus avoiding double taxation).
However, sole owners can also take advantage of this business structure as well by creating a single-member LLC (SMLLC). It's easier to set up and maintain than a corporation but still provides all the same legal benefits such as the ability to transfer ownership to another person. Depending on how you set up the SMLLC, it can be expanded to include other people at a later date.
Converting to an SMLLC is a good idea for a number of reasons:
How to Make the Conversion
Switching to an SMLLC from a sole proprietorship is actually very easy. The first step is to fill out the articles of organization for your state and file them with the relevant government entity in your area. For example, people who live in Michigan can download the limited liability form from the Department of Licensing and Regulatory Affairs website. You would then file this form with the Secretary of State.
In general, most states require filers to:
Once the agency receives your documents, it will endorse the papers after reviewing them for correctness. Once endorsed, your company will officially become an SMLLC.
It's important to note that all of the assets used for and debts associated with the business will automatically be converted into company property and must be treated as such from that point forward. For instance, the cash in the company bank account will officially become the business' asset. Any unpaid bills such as for supplies will become the responsibility of the company. Credit accounts and loans in your name, however, will need to be transferred into the company's name in order for you to enjoy the protection the SMLLC will provide.
After the paperwork has been approved by the government agency, be certain to update all documentation such as contracts, business cards, and vehicle registrations for company vehicles with your new business name as well as tell your business associates and clients about the change.
To maintain your SMLLC, you'll typically be required to file an annual report confirming your company's contact details and reporting certain information. Check with your local relevant government agency for specific details that apply to your business.
For more information about switching to a single-member LLC, connect with a business attorney. To learn more, contact a company like Carter West Law with any questions or concerns you have.
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