How to change from sole proprietor to limited liability company is a big step when you desire to expand your business and safeguard your assets. By switching from sole proprietorships to LLC you’ll:
- Increase peace of mind with your business. If you don’t own the business you don’t have to worry about business taxes, licensing fees, and payroll. You are the sole owner and you pay for what you use. Switching from sole proprietorships to a separate entity will free up your time from the day to day management of your business.
- Save money by not being taxed twice on the same income. When you change from sole proprietorships to a limited liability company your tax status changes immediately. This is because you become a C corporation instead of a partnership. Instead of paying taxes according to the partner’s income you are now paying taxes according to your partner’s individual income. The IRS form 8832 that you must file in order to incorporate has different income taxation brackets for personal and corporate income. This means that you won’t have to pay as much in personal income tax as you would have otherwise.
- Also, when you are changing from sole proprietorships to a limited liability company your personal assets are protected. If you happen to default on your loan the personal assets of the LLC are protected. That means that if your personal assets were to be liquidated the Limited Liability Company has the money to pay the loan. However, if you have kept your LLC separate you don’t lose anything. In addition, if you are sued, the LLC can pay your legal fees, unless they are owed exclusively to the LLC. So, it makes good sense to consider changing from a sole proprietorships to a limited liability company.
- Once you understand how the Limited Liability Company affects your taxes there are other things that you may need to consider. If you decide to open up a C corporation, you may need to wait three years before you’re able to incorporate a Limited Liability Company. In order to get a loan you may need to wait even longer.
There are many advantages to incorporating your business entity as an LLC. One of them is that the IRS won’t look at your personal credit score or demand additional information about the operation of your business. You will be able to deduct expenses just like you would a sole proprietorship, on your personal income tax return. You can also elect to be treated as a C corporation for tax purposes.