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Is it time to change your sole proprietorship into an LLC?

| Jun 16, 2023 | Business Formation And Planning |

Entrepreneurs begin with a common dream: to start their own business and make a profit. A sole proprietorship is the easiest and fastest way to work on that dream. You do not need a big budget, just a product or service to sell. You do not even need to register your sole proprietorship with the state, so formal paperwork is not necessary.

Your business is you. It may sound appealing at first since you make all the profit, and you make all the decisions. However, you assume all the risks and you take on all the  responsibilities because you and your business are not separate entities. It might be time to consider how a limited liability company (LLC) can benefit your dream.

The benefits of changing your business structure into an LLC

In a sole proprietorship, there is no legal distinction between your personal and business assets. If customer or client disputes arise or your business falls into debt, nothing is shielding your personal assets from seizure. These are the advantages of changing your business structure into an LLC:

  • An LLC will protect your personal assets from business debts and liabilities.
  • An LLC is a formal business entity, and that can be more attractive to investors and financial institutions.
  • An LLC can give you more funding options.
  • Formal business entities have legal protections.
  • An LLC does not limit the number of owners or members joining your business.
  • An LLC will grant you tax flexibility.

Despite the benefits of restructuring your business entity into an LLC, you must still consider how this can affect your business. Bringing in new partners will mean more paperwork and legal protections come with legal obligations.

Get it in writing

Changing your sole proprietorship into an LLC is not your only option. You might want to try a partnership business entity first or go straight into incorporating. Whatever you decide, make sure it is in writing. While an LLC and a corporation offer liability protection, they do not save you from disputes with other members or shareholders.